Credit that will provide for your basic interests

In the case of the death or critical illness of retiring owners before the planned retirement date, the agreement could either contemplate an immediate transfer of the remaining equity to the acquiring owners and immediate payment to the retiring owners or their estates (particularly if it had been possible to adequately insure the retiring owner for death or critical illness), or immediate transfer of interests but with payment on terms where, perhaps, no funding for the contingency was in place.

With agreement to purchase their interests (and, hopefully, funding for most contingencies in place), retiring owners in a small business merger have an almost watertight exit plan in place, whilst acquiring owners have the ability to plan for their acquisition with some certainty. Both parties must realise, however, that there is still a possibility that the plan will not work out entirely as planned.

The practical problems that can occur in these sorts of arrangements include the two owners not working well together in business, or not getting on personally. It is as well to recognise that it may be necessary to unwind the merger and to return to the status quo.

The initial credit score examination procedure

Sale of your interests. This involves the sale of your interests to the acquiring owner. The sale of your interests can be in stages, or all on your exit. Usually, it is accomplished in two stages as follows:

The initial purchase. There can either be no initial purchase (either because both businesses have the same value, or because the owners are happy to have an unequal shareholding), or there will be an initial purchase to arrive at an equal shareholding. Where this is so, it would constitute step five.

Although the initial purchase will usually be made at the time of the merger, payment for the shares or interests can, by agreement, be made at any time. Indeed, there could be a series of payments over a long period from the acquiring owner to the retiring owner, enabling the retiring owner to progressively quit his equity, and easing the financial burden on the acquiring owner.

b) The final purchase This envisages, at the time of retirement, the sale of the balance of the retiring owner’s interests to the acquiring owner, thus completing the retiring owner’s exit plan under the shareholders’ agreement. Again, payment terms can be negotiated to suit both parties.

Turn your attention to vital debt issues

The co-owners in the merged entity will, in most cases, not know each other particularly well and there will be concerns about whether they will be compatible. Because of this it might be wise to include some form of trial period in the agreement, while it is certainly prudent to include provisions that facilitate an easy split up of the merged business in the early stages.

You should now receive payment for the initial transfer of equity to the acquiring owner, if a transfer is to take place at this stage – see step seven below for expansion on this.

You are now in a position to turn your attention to how the business is going to be run, so your next step is to prepare an operational strategy or business plan for the merged business. During your initial meetings when you were considering the merit in the proposed merger (and when you should have conducted SWOT analyses of the respective businesses) you should have considered in general terms the broad strategy of the merged business. Your planning now concerns both the strategy for the proposed merged entity and the detailed planning issues or ‘things to do’ of a detailed business plan. You should consider such things as staffing, marketing, premises requirements, financing and operating systems in your plan. The plan should also look beyond the acquiring owner’s purchase of the retiring owner’s shares to his own exit strategy plan.

The formula for a credit optimalization

Matters of particular interest in shareholders’ agreements for sole trader mergers are the following: a) For retiring owners, the agreement to purchase their interests on retirement is the culmination of their exit plan. b) The question of how to treat the potential growth in value of the business while it is a merged entity managed by both owners can be a difficult one.

The matters to be considered are as follows:

The agreement will usually contain a valuation formula by which the business is to be valued at various times, or on the occurrence of various events. Should the profitability of the business grow, its value will also grow. In the normal course, business owners strive for growth in profitability, because this leads to larger dividend payouts and higher value for their equity. For retiring owners in the merged entity, any growth in value of the business should result in a
higher price being paid for the balance of their interests in the businesses.

But, acquiring owners have a dilemma: where a valuation formula is included in the agreement, the harder they work to build the merged business’s profitability and value, the more they will have to pay the retiring owners for their shares (although, of course, the acquiring owners’ shares will also increase in value proportionally). A compromise needs to be agreed in advance to solve this potential problem.

Credit lessons to be learned

Your original plan to exit through a family succession would probably have had two main objectives, namely:

Financial objectives You planned to sell the business to your son for an agreed price and, perhaps, accepted that payment would be made over time. Because you controlled the transaction, the price and payment terms could be tailored to fit your retirement plans.

Personal objectives You wanted your son to take over the business continue the family connection and be a business success. You would continue to work in the business in a consulting capacity until you decided to retire completely. Unfortunately, because you have fallen ill and have been forced to abandon your succession plan and sell the business through a trade sale, neither your financial nor personal objectives have been achieved.

THE LESSONS TO BE LEARNT

What lessons can we learn from this? Should all planning be abandoned because of the uncertainties of business and life? Not at all. I recommend that in planning for your exit you should take the following approach:

Determine why you wish to exit.

Consider whether this reason establishes (more or less) your exit date, or whether you need to set one.

Using this exit date as your target, assess the time available to you to plan your exit and choose the most favourable method of exit for your business.
4 Proceed planning on this basis, but recognise that your plans could be
derailed by unforeseen events (and that you might need a Plan B).
5 Most importantly of all: begin your planning immediately, because
you never know how much time you will have to execute your
plan

How much time with your credit you have left?

As you have seen, the reason for your exit (whether planned or otherwise) could have a direct influence on when the exit will take place. When the exit takes place will, obviously, influence the time you have to plan and, perhaps the method of exit employed. These factors could have a profound impact on the effectiveness of your planning and, consequently, the amount you receive for your business on disposal. Let us look at whatI mean by this.

Assume that you plan to leave your business to your son. Having read this book, you are aware that grooming an heir for succession is a timeconsuming task if it is to be done effectively. Consequently, you set up a 10-year plan to undertake the various steps necessary to prepare your son for the eventual role of running the business. Unfortunately, within a year you fall seriously ill. You have no time to continue with the grooming of your son and he is unprepared to take over the business. Also, there is no time available to investigate and arrange other possible exit routes, such as a management buy-out or a public flotation.

Most exit options are now closed to you and you will, probably only have the option of selling through a trade sale, if you are sufficiently well to arrange it. If you are unable to organise a trade sale, the business might be forced to sell its assets at fire sale prices and close down.

Actual reasons of debt problems

It is interesting to note that there are many other reasons (besides the anticipated reasons given above) why owners actually decide to exit their businesses. These include personal and business reasons. a) The owner’s personal reasons could be:

• a fall out with partners or shareholders (including family shareholders);
• family reasons, such as a divorce;
• ill health, necessitating an early retirement;
• to take up an employment opportunity;
• pure desire for change.

Business reasons could be:

• the business goes broke/is insolvent;
• it fails to reach minimum levels of income or profit.

The points to note here are the following:

• most of these reasons are unexpected or, at least, are not the reasons why a business owner would wish to exit;
• those owners who exit for the reasons they expect are able to plan within a time frame of their making;
• most business owners are compelled to exit for unanticipated reasons and, consequently, within a much shorter time frame than they had hoped. This will, probably, influence both the method and effectiveness of their exit.

Expected reasons for credit problems

When examining the reasons for exiting a business, we must distinguish between what business owners think will cause them to exit their businesses from the reasons why an exit actually happens.

When asked what will cause them to exit, the usual reason given by business owners is reaching ‘normal’ retirement age (which for most owners is about 60). This reason supplies both a why and a when answer, as the owner has a specific retirement age in mind. Owners also give the following reasons for exiting:

• Receiving a good offer for the business.
• Getting fed up/tired/bored/disillusioned with the business.
• When the business is worth a specific target value.
• If the business does not reach specific profit targets.
• If the business does not provide a reasonable living within a specified period.
• When a son/daughter/etc, is ready to take over and manage the business.
• When management or employees are ready to purchase the business.

You will notice that most of these reasons (other than, perhaps, where a target value is being aimed at) are open-ended as to time and do not, necessarily, set a target exit date, or establish an exit time frame.

How are credit investors attracted

Your exit from a business can be accomplished in stages. It might be part  of a company strategy to sell shares to investors as stage one and later, as stage two, to sell all the shares in a secondary buy-out, or to list the company on the Stock Exchange. If your potential investors are professional venture capitalists they will be very careful about investing their money and you will need to ensure all aspects of your business are structurally sound before you seek this investment. Examples of areas that might need attention to attract investors include intellectual property, directors’ service contracts, legal contracts and accounting systems.

INTELLECTUAL PROPERTY

You need to decide whether your intellectual property can be patented and, if so, you should consider doing this immediately. But proceed with caution. Securing a patent is expensive, so it is not worth proceeding unless there is a clear commercial benefit either in earning income or protecting your business from disruption. Also, to attract investors it is important that the intellectual property rights are clearly owned by the company and not, for example, by the directors. (The securing of patents is a complicated matter and expert advice should be obtained before you decide to proceed.)

Obtaining maximum credit flexibility

It is paramount that the business owner retains maximum exit planning flexibility, including the ability to sell 100% of the business when he so wishes. Where your company has granted an option to an employee that is still current, this option could still subsist when you sell your company. Consequently, any potential purchasers will know that they will have to inherit the option themselves and that this could result in their owning less than 100% of the company and, potentially, ending up with a stranger as a minority shareholder. The existence of a share option scheme could, therefore, make the business less attractive and could be what I call ‘a barrier to exit’, that is, something that makes a business more difficult to sell, or less valuable in the eyes of potential purchasers.

So, although the share option might have seemed to you originally to be an effective way of retaining a key manager to facilitate your exit, it could turn out to be an unwanted headache when it comes to satisfying a potential purchaser who is only interested in 100% of your business. Of course, like most other business problems, a solution is possible at a price and youcould always buy out the option. However, this costly solution can be avoided with forward planning.

• Recent Posts

  • Credit that will provide for your basic interests
  • The initial credit score examination procedure
  • Turn your attention to vital debt issues
  • The formula for a credit optimalization
  • Credit lessons to be learned
  • How much time with your credit you have left?
  • Actual reasons of debt problems
  • Expected reasons for credit problems
  • How are credit investors attracted
  • Obtaining maximum credit flexibility

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