Category Archives: Business Succession

An Eye to a Company’s Future – Sale, Acquisition and Succession Planning

Bruce J. Ackerman, Esq.
backerman@pashmanstein.com

As a business ages and grows, its owners face the ultimate decision:  Do we sell the business?  Do we acquire a synergistic company?  Or do we establish a succession plan to insure the company’s longevity and also provide for their financial security?  This decision involves planning.

Sale

Achieving success in the sale, acquisition, and succession planning of a business involves the same elements that make the business successful in the first instance – proper planning and implementation.  There are many choices, including selling to insiders, to employees through an employee stock ownership plan, to other owners, to a competitor or a third party.  The best planning starts long before the company goes to market and involves “putting its house in order.”

A team of professionals should be involved from the start to assist in this process.  The team should include an accountant, an attorney, a marketing professional and, perhaps, a valuation professional.  Typically, the company will choose either the accountant or the attorney to lead the team.  That choice is a personal one to the owner.  These professionals may or may not be the same professionals who provide day-to-day advice in those areas, since the sale process requires another knowledge base and experience in navigating that process successfully.

First, the company needs to work with its financial advisors to maximize its ability to present its financial picture in the best possible light.  This is a time to address cleaning up items on the company’s books that could cause doubt or even a claim or credit by an interested suitor.  For the sale of a business, this planning should begin several financial reporting cycles, if not years, prior to marketing the company for sale.  The accountant will also provide tax advice to the company as to transaction structure and for the owners.

Similarly, the company needs to work with its legal advisors to prepare for orderly due diligence of all its legal issues, such as all contracts, licenses, permits, employment issues, any environmental issues, and litigation.  Due diligence will involve a thorough review of all documentation of the company and will likely involve significant employee time.  If planned properly, the company can shore up its legal documentation, such as company manuals and policies, employment agreements, restrictive and non-circumvention covenants.  The attorney will also provide legal advice on the structure of the proposed transaction, negotiate and draft the sale/acquisition documents, and provide legal counsel during the transaction process.

The inclusion of a valuation professional can assist the selling company to validate the asking price and the acquiring entity to validate that price.  This type of support can be forceful for negotiations, both to help a selling company form its negotiating posture, but also to respond to contrary assertions on value.

Acquisition

Similar considerations apply when the company decides to target a strategic acquisition, rather than to sell.  The same team of professionals should be engaged to maximize success in that process.  Remember that the target company has also thought through and engaged in the above planning process prior to sale.  Therefore, careful review of its history is crucial.  Due diligence is essential and should involve company professionals and key personnel to validate the assumptions supporting the acquisition.

Succession Planning

For any closely held company that has decided on continuity, decisions on succession planning should be made.  This requires an initial plan and regular review and reconsideration.  Many companies have the option of perpetuating a business by transitioning leadership and ownership to family members and/or other insiders.  Similar to sale or acquisition, owners need to address family, tax, and estate planning issues.  Depending on the plan, different legal documentation applies, such as a standard Buy-Sell Agreement, a Cross-Purchase Agreement with Life Insurance, or a written succession plan to address continued management and control.  Greater detail is beyond the scope of this article.  However, it is most important to note that this is an interactive process that requires re-evaluation over time, rather than an event that occurs at a specific time and remains in place without change.

All businesses need to chart their future course, and planning is the key element.  Be prepared so that you can recognize the time to sell, the time to make a target acquisition, or to plan for the next generation to assume leadership and ownership.

Social Media and Family Court

By Robert Kornitzer, Esq.
rkornitzer@pashmanstein.com

The explosion of the numerous forms of social media has in many ways created a potentially fundamental alteration of the way in which family law litigation is conducted.  I will be addressing social media issues in future blogs as well as in this blog as this recent phenomenon (who ever heard of Facebook seven years ago?) has had a profound impact on the way that issues like custody and even financial issues will be addressed.  I will offer an example in this blog of the impact of social media with possible ramifications and will further develop the potential opportunities and dangers to litigants in future blogs and articles.  My example of what we see is based on an actual incident that I have witnessed.  The details here are not important but the broader issues raised are very significant.

We can start with Facebook and stream of consciousness allegations made by a parent in a custody matter.  This particular matter was a bitterly-contested custody dispute that extended many years after the divorce and the original custody determination.  The former wife (we will call her “Sally”) made the allegation in her court documents that her former husband (we will call him “George”) had recently attempted to burn her house down by setting fire to her porch.  She was obviously attempting to raise to the court concerns over George’s mental stability.

In addition, Sally was simultaneously posting entries on Facebook as to her beliefs of George’s alleged arson and her fears of him.  Multiple posting by Sally and her “friends” on Facebook ensued, with many postings, decrying the alleged mental instability of George.  These postings were viewed by George’s personal acquaintances, business referral sources and even the parties’ daughter, who was a “friend” of Sally’s on Facebook.  George finally learned about this from a “friend” who advised him of the exchange.

A copy of the postings were forwarded to George, which George read with disgust, knowing that the allegations were untrue and realizing that his reputation was being sullied with him powerless to prevent it.  However, George was even more astounded when he read the final postings that contained Sally’s admission that she was wrong; that the fire was as a result of a frayed electrical cord.  The court eventually learned of the misrepresentation.  Sally never issued an apology to George, either personally or on Facebook.

Look at all the possible issues that were created by Sally’s postings. She disseminated false allegations to possibly hundreds of people, many of who know both parents.  Does George have a possible tort action against Sally?  Sally may have admitted to falsely certifying to the court serious allegations about George affecting perceptions about him.  Was Sally attempting to alienate the child against George, knowing the child would be reading her posts and her other friends’ posts?

It is clear that use, or more accurately, misuse of a social media can have significant impact on a custody matter.  This theme will continue to be developed in future entries.

Divorce and Restraints Against Dissipating Assets

By Tadd Yearing, Esq.
tyearing@pashmanstein.com

In New Jersey, to prevent a party from dissipating marital assets or incurring unreasonable debt during the divorce, the courts require a party to file an application during the litigation seeking an injunction against the spouse acting in bad faith. The onus is, thus, on the parties themselves to seek the protection of the court.

Not all states agree with this procedure. In 2009, New York amended its laws to incorporate an automatic injunctive order into all matrimonial actions that is binding on both parties. (N.Y. Domestic Relations Law § 236 (B) (2)).  Under this framework, the plaintiff must simultaneously serve the defendant with the Complaint for Divorce along with an “automatic order” compliant with the statutory requirements. The order is deemed binding on the plaintiff upon filing and upon the defendant upon receipt of service.  The order remains in effect for the duration of the divorce action (unless terminated or amended by subsequent order of the court or written agreement between the parties) and, broadly, prohibits both parties from selling, transfering, encumbering, concealing, assigning, removing or in any way disposing of any marital property without the consent of the other party in writing, or by order of the court.

There is a certain common sense rationale to New York’s law, as it clearly is intended to reduce legal fees by making one of the most commonly requested, and almost always granted, forms of relief the default position of the parties.  It also sets an important tone for the discovery process, which can be riddled with gamesmanship and efforts to hide income or assets. While I am generally against the efforts by states to make the divorce process a “canned” event, and where New Jersey is often cited as one of the most progressive and cutting-edge jurisdictions in the country for its efforts to resist the one-size-fits-all mentality of other states, the notion of a mutual automatic restraint on the dissipation of assets is an instance where a less modern sister-state has an interesting idea at least worth considering.

Planning for the Future of Your Business

By Louis Pashman, Esq.
lpashman@pashmanstein.com

You own a successful family business. It’s time to plan for the next generation. Remember, one out of three family businesses fails in the second generation and the figure is even more distressing in the third generation. Consider the following situations and apply this advice where it fits.

1. You own the business with your sibling (or another family member) and members of the next generation from both families are active in the business. The situation is comparable if you own the business yourself and more than one of your children is involved in the business and capable of running it. In either event, it is generally wise to identify who in the next generation is most capable of running the business. Because it is always difficult to split leadership, you must take proactive steps to work out ownership interests and rights to management, possibly using such tools as trusts, buyouts, and annuities to ensure an equitable distribution of assets.

2. You own the business yourself and you have three children, none of whom is involved or interested in the business. You likely will want either to sell the business during your lifetime or bring in an outsider to run the business during your life, with a buyout upon your retirement or death. The buyout, properly structured, can also help provide for your family after your retirement or death.

3. You have more than one child, but only one is involved in the business and is qualified to run it. In this event, business succession is fairly straightforward. The more difficult issue is—assuming you want to treat your children equally—how do you leave the business to one child and provide equally for the others after death? Consider life insurance, trusts, buyouts, and other tools.

There are many variations on these scenarios and just as many ways to deal with each of them. The first requirement is that you deal openly and honestly with your children (and your co-owner’s family, if applicable). Open communication allows you and your family to plan properly in a way that will minimize disruption to the business and the family and at the same time allow you to take advantage of available tax provisions. Consult your professional advisers and be honest with them as well.