A sudden change in one’s business or personal life may require the sale of one’s company, shareholders needing to be replaced, or the quick liquidation of business assets.  During these difficult times, many business owners are caught off guard and settle for less due to poor counsel and short times.  In times like these, you can still come out on top by doing a little homework and implementation before any potential storms present themselves.

We have been privy to many, once great companies, who faced sudden situations where the managing shareholders went through personal tragedies such as divorce, health issues and even incapacitation.  

As an example, we’ve had two principals expire during transactions over the last fourteen years forever changing the lives of those dear to them.  In both situations, each principal played a key role in his business. When the unexpected occurred, one of the companies was growing through an acquisition that, due to the death, never closed and the remaining family members were not able to run the business with the same continuity, eventually having to liquidate.  The other situation was not much different except that a plan was executed to transition the business to new ownership.  The success of this plan dramatically changed how that family was able to transition forward.

In business, a sudden change could be the result of just about anything, but most times involve shareholder disputes, health issues of a shareholder or the loss or gain of a major customer.  Although many business owners will never have to deal with sudden life impacts such as these, some will undoubtedly be faced with these situations. 

Now that the picture is painted, let’s shed some light on solutions that may mitigate such impacts.

Business Liquidation: Generally speaking, liquidation of the business and its assets is the quickest and simplest way to deal with a dire situation such as the death of the principal owner.  Unfortunately, it is also one of the least economically satisfying solutions.  Liquidation is usually considered only after other potential solutions that would yield greater economic benefits to the business owners have been ruled out. When liquidation is the chosen path, it is important not to overlook the value of intangible assets that can be sold.  Many times, business owners overlook the value of intellectual property, business name, customer base and other intangible property. Usually, there are synergistic companies that can benefit by the purchase of such items and would be willing to pay something for them.  In this case, time is money and one must have a plan and move quickly to secure the right buyer.   

Business Sale Due to Personal Issue: The sale of a business due to personal issues most times involves the failing heath of the principal owner or an immediate family member, divorce or pursuit of other interests.  Each situation is unique, however, the owner usually has a preconceived time frame in which the business is to be sold.  In order to realize the highest value and ferret out the best available acquirer, a full scale marketing plan should be implemented, time permitting.  If the situation dictates a quicker sale, a limited marketing plan can be undertaken, narrowing the targeted pool of potential buyers with the trade off being a quicker sale for a likely lower selling price and/or a sale on terms less beneficial to the owner.  If circumstances dictate an immediate sale above all else, the owner usually has very little choice but to accept what might normally be considered a sub-standard offer from a well-qualified buyer who can close the deal quickly. The more profitable the business is, even with short time frames, the best results will be achieved through an auction-type sale.  It is important that even if only one buyer is bidding, the buyer still has the pressure of feeling that he is not the only one. Using arms-length third party representation is critical for this situation.

Loss of Key Customers:  We’ve all heard the stories about a company that was flying high reaching gross sales revenues and profit levels beyond its wildest imagination, usually spurred by a strategic and exclusive relationship with a major box store or technology company.  What happens when the business or products fall out of favor with the customer?  Well, the contract is canceled and the business is left scrambling to pick-up the pieces when 50 percent or more of its revenues just vanished.  What to do?  Although there are not a lot of options in this situation, if the business can “hold on” during this difficult time, it should work hard to diversify the customer base so the loss of any one customer in the future will not be a devastating blow.  Other potential options include the sale to a synergistic acquirer or forming a joint venture with another well-established, well-respected company.  The key to each situation is the perceived ability of the acquirer or joint venturer to either re-establish a relationship with the lost customer or replace the customer with one or more new customers.  In any case, the value of the business will not be what it was before the customer was lost.  The best remedy for this predicament is not to allow one major customer dictate your business health for to long. Diversification or growth through an acquisition as soon as possible.

Shareholder Disputes: The source of shareholder disputes can be many including divorce, personality conflicts and different visions for the future of the company.  Many shareholder disputes cannot be prevented, however, they can be remedied by having a well-written buy-sell agreement in place that will dictate the exact course of action for a particular situation.  I have seen several cases where the shareholders got along just fine, however, when one shareholder died or became incapacitated and the other shareholders are then dealing with heirs or representatives, the problems really began.  What may have been the “understanding” between the shareholders may not be known or clear to the representatives or heirs.  The buy-sell agreement is really a prenuptial agreement among the shareholders that speaks to events of “divorce,” death or incapacity of a shareholder.  It is important to have a buy-sell agreement for your company, to know and follow its terms and to update it regularly.  With the proper tools in place, it allows the remaining shareholders to sell the company to a third party or obtain financing in a timely manner without to much interruption to the business.

Unpredicted or Extreme Revenue Growth: The unexpected may not always spell catastrophe.  We have advised some business owners who have built great companies that are thriving beyond their capacity, capabilities or just consuming a large portion or their personal net worth sustaining growth. Sales growth many times increases the personal risk of its shareholders to uncomfortable levels, and is sometimes restrained purposely by the ownership in order to lessen their own immediate risk.  As growing companies usually do not have excess working capital, they need time to allow the company to build up the capital and infrastructure required to maintain and service the current customer base, preparing for further growth.

In such situations of extreme high growth, many business owners explore the possibility of recapitalization, with the desired result being to acquire needed working capital to sustain rapid growth while removing some of their own risk.  Yes, unlike venture capital, the proceeds go the shareholders in exchange for equity with additional funds allocated for revenue growth.  An added benefit of a recapitalization is that additional expertise is usually added into the mix, which will help to plan and manage the rapid growth.  After completion of recapitalization, the owner usually retains equal or minority ownership in the company and continues to work for several years if he or she so desires.  The business is allowed to grow for three to seven more years with a second exit plan in place, allowing the shareholders to sell their shares at a higher value, taking a much larger, second bite out of the apple, so to speak. 

The best plan is to expect the unexpected and to have a business succession plan that addresses each potential situation with a favorable outcome.  If you start with the result in mind and document the steps that will get you there you are well on your way to preparing your company for its future.

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Mark Gould is a VERCOR Partner and Co-Founder, Certified Business Intermediary (CBI), Master Mergers & Acquisitions Intermediary (MMAI), and Certified Business Opportunity Appraiser (CBOA). Mark is also a co-author of “The Business Sale … An Owner's Most Perilous Expedition.”  Mark has owned 10 businesses and has provided valuation, merger and acquisition services to over 500 companies in a wide range of industries.  Mark works out of VERCOR’S West Coast office.