Roth, Bacon, Moon, Attorneys, llc Podcast: Items to Consider in Business Transitions

Jessica Moon from Roth Bacon Moon Attorney's, LLC talks about some of the items to consider in business transitions

Episode Transcript

(00:00):
Join us. Right now is JessicaMoon from Roth Bacon Moon and Associates.
Am I saying that right? RothBacon Moon attorney? Attorneys? I always
say senior partners exactly, so attorneysand Jessica always it's great to see you.
We love it when you come inand you always have a lot of
good things to talk about. AndI know that when Paul's done it with

(00:21):
you, when I've done this withyou, I feel like we always learn
something new that maybe we took forgranted or didn't even think about, and
I always look forward to that.Well, I got to throw that right
back at you, because you andPaul both challenge me when we are getting
into these topics, and I knowsometimes we have to stop and edit and
pull out information because I'm oh,I, well, I didn't think about
the question like that. And soI really appreciate the back and forth.

(00:44):
I think it's helpful to the listenersbecause it is conversational, so a lot
of these things will apply to themin different ways, and your mind works
differently than my mind, and soit's it's just a it's a nice challenge.
Absolutely, And again you sent methe top today and we're dealing with
something that, again not something Ithink about all the time, but sometimes

(01:06):
you fall into this thing or youfind yourself maybe a family member or yourself
falling into this and it's a youknow what you need to consider with business
transitions, which can be buying anew business or buying out a partner or
anything like that. What do youthink is what brought that to your mind
for this topic? What was thething? Did something happen? Did you

(01:29):
have some questions that came up?I was just going to lead into that.
Typically I like to discuss topics thatkeep a reappearing in my client and
for whatever reason, right now,I have a lot of business transitions going
on. I have a lot ofshifts from people that are exiting their own
company, people that are selling,people that are buying acquiring new companies,

(01:55):
and it's just it's really kind ofodd because there's nothing that I can point
to out in the economy that says, this is why this is happening.
And maybe it's the retirement of theboomer generation, but it seems like a
lot of that stuff is happening rightnow with my clients, and personally,
I work with my father and Jeffwho are both senior partners and both still

(02:16):
active in the company but transitioning outa little bit. So I'm kind of
living this on the inside as wellas seeing it on the outside happening.
People have to move on, peoplehave to come in, things have to
change. As much as I hateit, I typically our profession seems to
always be following up on what hasalready happened in the culture in transactions.

(02:43):
So we are the record keepers.Because we are the record keepers, we
are usually in the place where we'recleaning up the things on the back ends.
Yeah, so this is this ismy attempt to kind of lay seeds
for the listeners out there on whatto expect and maybe they can use it
on the front end to determine howthey want to exit their business or how

(03:05):
they want to acquire a new business. Just because there are some things that
will repeat. I don't care howmuch things change. Some things repeat,
and you can borrow from other people'sexperiences in order to make yours a little
bit better, a little bit moreefficient. And I think this probably I
think I know the answer to this. But is this another one of those
topics like estate planning and things likethat, where sometimes the business partners or

(03:30):
the people in business don't talk aboutit. What is the next step,
What is it that we want todo, Do we want to sell,
do we want to move it onto the family. It seems like it's
probably one of those things that doesn'tget talked about. Absolutely so there and
it's easier. It's easier to talkwith somebody who's not involved at all.
I typically find that because you arelooking at it from the outside of a

(03:53):
purely unemotional perspective, and I wastalking to a third party just you know,
relaying my own financial information. Goeswell, of course this is emotional,
this is you. You're allowed tobring emotion into it, so I
don't want to divorce that from theconversation. But when you're just trying to

(04:14):
lay it out, you need toassess it cold. What are you doing?
What are you buying? Are youbuying a personal services industry? Are
you already inside of it? Isthis a business that you want to start
up and produce widgets? And it'svery objective and not personal. There are
different approaches that you're going to takeinto consideration when you're doing that. Worth

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is not the same thing as valueand where does that come into play?
How do you assess a value tothat in a way that is approachable objectively
and can be agreed upon. Maybeit's maybe it's never an objective answer,
but it can be agreed upon inthe most tax advantageous way to the buyer

(04:56):
and the seller so that they cancapitalize on the transition. Keep it smooth.
So what are the objectives when you'regoing through coming from a buyer side.
Is there going to be financing?Do you have sufficient funds there to
operate for a period of time givenwhat you need to keep producing or keep
offering to people? From the seller'sperspective, do you need to say somewhat

(05:21):
employed in the company. Are yourelying on the company for health insurance purposes?
Would you just like to scale back? Would you like to transition over
a lot of times when we havefamily businesses being transferred, you will see
that the terms of the agreement maybeover time, because there's not that concern

(05:41):
that the seller is just going todrop out and walk away because they've got
family, they've got legacy going onthere. So maybe you want to build
in things about the business sale itselfwhere they can revisit they can say,
Okay, well, in a year, we're going to come back and assess
whether or not the earnings are suchthat we need to reevaluate the purchase price
for year two, or for yearfive, or for year ten, or

(06:05):
if it is unemotional and it's notfamily. You want to get the most
bang for your buck, so youwant to make sure that you are secured.
If you're a buyer, you aresecuring the assets of the company in
addition to the goodwill of the seller. You're making sure that if from a

(06:27):
seller's perspective, you want to makesure that you're going to get paid regardless
of what happens to the company ornot. And that's a cold way of
saying it, but maybe you're notinvested in the success. You're grateful for
the opportunity, but you've got tomake sure that you've got security agreements on
the hard assets of the buildings,of the fixtures of the improvements, and

(06:48):
that maybe you also have the selleron the hook individually, so that in
the event that you've got all ofyour security tied up in this company that
later goes bankrupt, you still haverecourse against your original deal what you agreed
to. So if you are thebuyer, you want to make sure that

(07:09):
you've got adequate insurance against that result, that you've you've done the due diligence
of what you need to survive.If there are key employees in the business,
making sure that you've secured them forsome period of time that you would
need them, and maybe one ofthe key employees is the seller. Maybe
the seller is going to agree tostay on from a consulting perspective for the

(07:29):
next couple of years at least toensure success of the business of being handed
off. So everything that you're sayingmakes a whole lot of sense. I
kind of come back to you know, as the seller, and it's your
second bullet point. Here are youprotected in the event that the buyer collapses?
Is that something that happens a lotbecause you'll hear about I know,

(07:55):
locally, we'll hear, well,this person's buying this business or this transaction.
We'll see it in the paper,even if it's a new business coming
in they're just buying the land orwhatever, which I imagine is a whole
another thing. Does it happen veryfrequently where maybe that that sale collapses because

(08:16):
you know the person that's buying.It ends up they didn't have everything that
they thought and maybe they weren't asprepared with everything legally or covered like they
should have been. Right, weall go in doide and hopeful and optimistic,
and that just not always the case. And you know, even when
the buyer may may have a changeof heart at some point and just decide

(08:39):
to operate differently. But it's youknow, we don't We hope we don't
fail, but we set it upso that everybody is well versed or they
appreciate the risks involved and they knowthat even if this fails, I at
least get the first crack at thereal estate value. If it's sold,

(09:01):
the seller is holding a mortgage onit, then there's no it doesn't matter
who the buyer sells to, ourtransitions out of or whether or not the
buyer is successful. That real estateis not getting up and walking away.
So the only thing that the sellerwould be risking in that particular transaction is
that the real property market tanks andthey can't get a return on her investment.
But they had that before they soldanyway, So that's a risk that

(09:24):
everybody is bearing from a buyer's perspective, just making sure that where you are
personally obligating yourself that there's a limit. All right, Yes, I agree
that I am buying this, butthe seller's goodwill is worth this or the

(09:48):
hard assets are what we're going tobe limited to. And in a personal
services transition, that's really tough,okay, because the seller can be really
vested in the buyer success, butthe buyer is not the seller personally,
and the more goodwill that turns on, the more you just it's volatile,
you don't know. And that's whywhen people are pricing businesses for sale,

(10:11):
if it is something that is trulypersonal, it's a truly personal function of
somebody in sales, maybe to theextent that the product is not freely transferable.
I'm trying to think of, well, like what I do, or
a consultant in general, an advisor. Yes, there are particular products that

(10:33):
are capable of being replicated, butfor something that turns very much on that
individual seller, the buyer has tofactor that in when they're trying to arrive
at a purchase price. And ifit's more volatile, the seller is going
to get less for it. Andthat's just because the seller can't sell that

(10:54):
to the extent that the seller can, there's good tax treatment for the seller,
but to the extent the seller cantransfer that, it makes it more
the seller is the most unique.When the seller individually is the most unique
part of the transaction, that's adifficult transfer to hand off. And so

(11:16):
you'll see personal services firms or thingor businesses that are not capable of replication
being offered probably for less than whatthey're worth because they can't hand that off.
The seller can't work forever. Thebuyer cannot become the seller. So
the buyer is going to have theirown hopefully goodwill, but they'll have to
be vested in their own success atthat point as far as financing goes and

(11:41):
whether the company transitions over. Butgoodwill is really a hard, hard asset
to put to paper, and that'sto the extent that the seller is able
to create something not only on theirown personality, but also to create something
an idea that is capable of replication, that's where you're really going to be

(12:03):
able to transfer that value and therisk is kind of eliminated in that regard.
So the buyer's success is more sure. And if the buyer's success is
more sure based upon the efforts ofthe seller, then the business sells for
more. And so to the extentthat we can keep that cycle going and
keep innovating and keep making these processescapable of being replicated, that there's more

(12:31):
value there just creating value out ofwhole cloth. So does that make sense?
That does make sense. It makesme think of services like a dentist's
office. Yes, So let's saythat there's a dentist office that's been at
the same location, same dentist,a lot of the same staff for twenty
five years, thirty years, andthen suddenly the sadly the dentist passes away,

(12:58):
and maybe he's left it in hisyou know, his will or whatever
what would happen. But in mostcases that's going to just go up for
sale, and so the the newdental or new dentist comes in, he's
taken over this book of business,but he doesn't have all that goodwill because

(13:20):
they don't know him if it's notsomebody that was already there. And so
I would imagine like the value inthat situation would be, well, there's
a great, you know book ofbusiness here, so that's valuable but can
you keep it and can you canyou actually make that work and try You're

(13:41):
right trying to figure out the valueof that, especially if it was a
situation where that dentist retire. Hedidn't pass away retired. He wants to
get paid because he worked hard toget all of that business. So for
him, it's like this is wortha ton. But for the person or
that, I should say, theseller, the buyer is sitting there going,

(14:03):
well, I've got to try tokeep them. Amen. You really
have hit the nail right on thehead. That's the whole point is when
you're yeah, you can buy them, that doesn't mean you're going to keep
them. That doesn't mean they're goingto buy you. And that's the hard
thing about personal services transitions. Andthat's exactly in a similar scenario where you

(14:24):
have like an accountant or the passesaway, or an attorney that passes away,
or a dentist that passes away youwhen you're transitioning over as the family
members or whoever is left holding thebag at the end of that, At
that point, you're basically dwindling downand saying, all right, where we're
going to sell the hard assets,We're going to sell the fixtures. We're
going to sell the equipment, We'regoing to sell the building because everything else

(14:46):
is just going to be too hard. And I don't want to discourage people
from going out there and buying miningclient lists. That is something that is
capable of being transitioned over. It'sobjectively. Look, you can see this
is what I'm buying, but youcan't buy unless there are contracts that are
being assumed, which does happen,And yes, we do need to follow

(15:09):
up on that in a transactional insurance. Yes, yeah, those those are
policies that I'm buying. Those areyou know, even in contracting or something
like that. I have offered todo this work. I'm going to be
unable to complete it, but Iam going to send this person who is
now assuming my business into do it. Now. Assuming that there are some

(15:30):
assignments caused in those contracts that canrelate to any sort of business, then
that buyer can assume that work atthat agreed previous commission or rate or whatever
was there, and so those thingscan be assigned. But just the idea
that you're going to keep servicing anew job each time, that's going to
be a case. By case basis, and those clients will either fall off

(15:54):
or they will continue and invest more. It really just depends. It depends
on the person. And so thoseI think people need to be sober about
those judgments when they're coming in,not only as to what the seller's abilities
are, but they're obviously their ownabilities to keep that going and to have
some faith in themselves and some driveand pick themselves up on the bootstraps and

(16:15):
get going. And I don't thinkanybody ever and I've never bought a business,
but I don't think anybody ever boughta business and then just sat back
and been like, Okay, yeah, I bought it. There, we're
good. It does take work,that's for sure. So we've kind of
covered most everything. But the lastthing is what are those long term considerations

(16:36):
for the buyer? And I thinkthat's definitely the thing that does not get
thought about unless you can have somebodylike you step in and say, hey,
we've got to look at this stuff. Yeah, no, thank you.
I have my acronyms here slapping mein the faces and reminders there are
places I have bwc ss I RS, the places that I would want to
make sure that the buyer has setup, and increasingly, clients are getting

(17:03):
really sophisticated in this stuff. Everybody'sdoing their own startups or whatever all over
and I'm finding that more and more. But clients are coming in even before
they are acquiring businesses, and they'resaying, I want to start a business
with my friend, or with myspouse, or with some third unrelated party.
But we just we work really welltogether. How do we get this

(17:26):
in place? So you need todecide, all right, let's limit liability
exposure. So maybe you might notbe able to do that with the seller
because of all of those things thatI've just advised about, but you can
say, we don't know if we'regoing to succeed on the outside, so
let's limit the risk. Let's createthis box that will transact business for us.

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And that way, if the boxfails for whatever reason, the people
that it failed will be limited torecovering that box and its contents. They
won't come back after my house,they won't come back after my personal bank
accounts or my kids. Twenty nine. All of that stuff is outside of
what's going on here. Making surethat you're filing with the Secretary of State,

(18:08):
whatever business you decide to start up, making sure you're getting tax identity
with the irs. Whether you're asole proprietorship and you don't need a separate
tax identification number, or if you'regoing to have many investors involved and you
definitely are structured as a partnership oras a corporation with shareholders or a hybrid

(18:30):
combination of the two, you've gotthat identification number associated with that separate box
and Bureau of Workers comp making surethat if you're going to have employees,
that you get adequate insurance coverage.You make yourself known, you get the
posters, you hang all that stuffup, and of course you ignore the
spam that comes with every business filing. No, you don't need to pay

(18:52):
for your certificate of good standing justbecause you just started a business, or
no, you don't need to gocheck their courthouse for your deed transfer when
you're looking when you move the propertyinto the business. I just throw that
out there, because usually clients arepretty smart about that, but it's they
do try to catch you off guard. But then the considerations where you're not

(19:14):
filing to a third party, howdo I structure it so that if I'm
unable to act. During the courseof this, I didn't intend to become
disabled or incapacitated or pass away.What happens to my interest? Does my
family step in my shoes? Maybethey get equity, Maybe they don't have

(19:36):
any rights to manage that. Who'sgoing to manage in the absence of you
being there? And if you're startingthe company with another person, you better
believe that they'll be interested in who'sgoing to be managing if you're not there.
But that doesn't mean that you leaveit all on the table either.
I actually have had companies of unrelatedparties where they just did transfer it automatically

(19:59):
to the surviving owner. They said, yeah, we understand this is wholly
personal services and it's wholly incapable ofbeing valued, and so they get my
share of the real estate or endyour end profits. But the rest of
it I'm leaving on the table.It's going automatically to the other party.
Or maybe there's just significant assets thatthe company is built up, and you

(20:22):
say, no, when I die, my kids get it now. They
don't get any management rights in it, but they're definitely going to get paid
out. And are we going toput a hardship on the company by making
it go through a business valuation whenyou die or when you're incapacitated, is
there going to be life insurance that'sgoing to be obtained in order to pay
that off in order to ensure thatthe family can get paid without the business

(20:45):
going under, without the assets havingto be sold, And is it going
to be how are you going tovalue the business when you're on the back
end of that, So you spendall this time upfront deciding whether or not
you could buy it. Now wegot to figure out whether or not you
can sell it. Are you goingto be limiting yourself to the book value
of the assets what it holds,or is there going to be all that

(21:06):
good will baked in? And theseare much easier to address when everybody is
doughide and naive and happy and excitedand all of that, because it's easier
to think about things going wrong whenyou've got that mindset going and you approach
it unemotionally because things haven't gone wrongyet. But the agreements can always be

(21:27):
changed. They can always be whenyou're at that point, the family members
and the surviving company holders can alwaysdecide to do something differently. The reason
that we have agreements in place inthe first place is in the event they
cannot agree to do something differently,then they at least have a baseline of

(21:47):
where they have to come back andsay, well, we can't agree on
this value. This is what theagreement says. In the absence of an
agreement, it will be bought outover a five year term at prime rate
and it'll be privately financed by thecompany, or they can just go ahead
and go get a loan. Butthat's on the company's decision. In the

(22:08):
meantime, management stays the same becausewe wanted continuity of the business when we
set it up, understanding that thefamily may have to sit and wait to
be paid out. So those arejust things baseline considerations. There's a whole
bunch of things that can go wrong, hopefully not, and that's why it's
basically the whole agreement is a disabilitypolicy. We hope that we never have

(22:33):
to use it, but it's therejust in case. So I think what
I think of when I hear allthis Number one, it's it's a lot
of information to take in and alot of things that going into a business
you just don't think of. Butwhat I come back to is that it's
really nice to be able to havesomebody in your position that we can go

(22:56):
to and help set that up.I think everybody knows that if you're going
to buy a business, you needto speak with an attorney. You know
that going in because there's contracts andall. Some of people have done really
well operating on Grace and I encouragethat. But at the same time,
for those of us out there,yeah, it seemed to hit every stumbling
block along the way. It's it'simportant to just get a second opinion,

(23:22):
to just bounce it around and seeif there's some things that you haven't thought
of, because I get that frommy clients all the time, just like
I get it from you and Paul. Sometimes you just you're not thinking that
way, and especially if you're onthe inside, you're not thinking that way.
And if we are all going intosomething naive, chances are we're not
thinking that way. So that's that'sgood. But again repeating what you what

(23:44):
you're saying, it's not bad togoing naive. It's just, you know,
make sure you know the right questionsthat need to be asked, and
if you don't know, then theycan call you or someone in your position
that can take care of asking thosequestions to prepare you for what's next.
Agreed. Agreed. The dreamers ownthis world, and the rest of us
are just lucky enough to sweep upafter them. So god speed to everybody

(24:07):
out there. You go, well, Jessica, now I'm going to go
out and buy a business. SoI mean, I feel like I know
everything. We already know. You'vegot several of them. Well, we'll
just make one of them real profitable. But remind everybody how they can get
ahold of you guys at Rothbacon MoonAttorneys. Find us online at Rothbacon law
dot com and call us at fourone nine two nine four two two three

(24:32):
two. We are located in Marion, Upper Sandusky, Port Clinton, and
Fort Myers, Florida.