Luke Campbell – Sterling Point Advisors; Brian Autry – Kenison, Dudley & Crawford, LLC
Do you know what will happen to the business you’ve worked hard to establish when you retire, pass away, or become unable to manage the company?
According to the North American Industry Classification System, there are approximately 342,000 businesses in the United States lower middle market (generating between $5 million and $100 million annual revenue). A 2019 report by the National Association of Corporate Directors shows that fewer than 25 percent of private companies have a formal succession plan that identifies directions for transitioning from a current CEO or managing partner to a successive owner. Without a proactive plan, business owners are often unprepared when they are ready to retire or exit their businesses, leading to suboptimal results for themselves, their company, and their employees.
For business owners, a formal succession plan satisfies a number of goals:
- Secure a financial future for themselves and their families
- Identify the right leaders and partners to carry their company forward
- Provide continued security and growth opportunities for employees
- Prepare for effective financial and tax planning for significant change in asset composition
Therefore, the most important and valuable thing you can do as a business owner to ensure a successful transition is to plan ahead. Don’t wait until you are ready to retire to start this conversation. Identifying a clear plan while you are still actively involved in the company will prevent confusion and family disputes when the time to transition comes around. In addition, it makes your business more marketable and attractive to potential investor groups. Too often, business owners spend a lifetime building their businesses but settle for liquidating their assets, handing the keys to an unprepared employee or family member, or accepting an unsolicited offer due to improper planning. In fact, according to the International Business Brokers Association, 20 percent of lower middle market business transactions occur because the owner received an unsolicited offer.
Methods of ownership transition can vary. One common method is a buy-sell agreement. For example, when a certain event occurs (such as when a current owner passes away or retires), the business is sold to employees of the company, family members, or the owner of another business. A buy-sell agreement establishes an estate tax value for the business and is also useful in allowing shareholders in a family business to purchase the previous business owner’s interest at a predetermined price. Please note, however, that this option is most useful when only a small number of shareholders are involved. Otherwise, it can be costly.
You may also choose to “gift” your business to keep it—and its assets—in-house. It seems simple enough just to leave your business to your children, but that has serious tax implications. Those running the company you leave behind often struggle with paying estate taxes after your death. Also, any bank loans or lines of credit may be called by the bank, requiring any outstanding loan amounts be paid immediately. It can put any business in a financial pinch and often leads to the new owners having to sell the business. A tax professional can guide you through certain IRS tax code provisions (Section 6166 and Section 303 of the tax code) available to help qualifying businesses avoid that.
Another option is to market your business to potential investors. There are thousands of investor groups and strategic buyers in the United States who are interested in businesses of all types. M&A advisors are often used to help business owners identify potential investors, cultivate interest, and assist with negotiations. One advantage of this route is that a formal marketing process often leads to multiple competing offers. Unsolicited, direct offers are often not the most competitive, and multiple offers can lead to higher value for your business as well as allow you to select the best partner to carry your company forward.
As you can see, there are a lot of things to consider when determining how your company will continue on when you are no longer at the helm. A succession plan helps you ensure a smooth transition of leadership over multiple years and prepare your business for a successful sale to a new ownership group.
The sale or succession of your business is much more than a transaction. It is the culmination of your life’s work. As you consider your eventual transition, ensure the best possible outcome for your family, your company, and your employees: plan ahead and get advice. A team of trusted financial and legal advisors can ensure your succession plan is thoughtfully created and thoroughly executed.
About Sterling Point Advisors: Sterling Point Advisors is itself a family-owned business providing M&A advisory services to family-owned and privately held businesses. We help business owners navigate the strategic challenges of growing or exiting their businesses.Read More
by Kyle D. McGann
As a contractor, supplier, or design professional, you should be able to rejoice and feel a sense of pride in the work you’ve done at the end of a project. But what happens when your invoices are left unpaid? That pride can quickly turn into frustration, especially for those larger bills left hanging out there. Luckily, most states, including South Carolina, offer contractors, suppliers, and design professionals the ability to place a lien, most notably a mechanic’s lien, on the property where labor and materials were supplied for improvements to the property.
Generally speaking, a lien is a security interest against a certain piece of property. If debts go unpaid, the lienholder has certain proprietary rights to collect against the property rather than relying on an owner’s bank account, which might resemble something eerily similar to the bank account of a graduate student who has been eating instant ramen for the past week. One of the most common liens is a mortgage, where a lender provides a loan to purchase or improve property and the owner uses the property as collateral to secure payment of the loan.
In the construction world, contractors, suppliers, and design professionals can record a “mechanic’s lien” against the property they are improving if their bills go ignored. As an added bonus, you may recover any attorney’s fees incurred as the result of recording and foreclosing on the lien (our next blog will detail foreclosing on liens). Nearly identical in theory to a mortgage, an owner is implicitly putting the property being improved as collateral for the labor and materials you provide.
For general contractors, the net collateral amount may be diminished and put you in a monetary bind if you don’t check all the necessary boxes at the very beginning of a construction project. A general contractor can furnish an optional Notice of Project Commencement (“Commencement Notice”). As the name implies, the general contractor files the Commencement Notice within 15 days of beginning the project with the Register of Deeds office in the county where the project is located. The Commencement Notice must include the name of the general contractor, address of the project, name of the owner, and an exact description of the project.
The Commencement Notice lets everyone know that the general contractor is running this show. This is especially important because a general contractor’s subcontractors tend to hire their own subcontractors (sub-subcontractors) or suppliers (“Second Tier Subs”) to perform parts or all of the scope of work. But, sometimes, subcontractors “forget to pay” their Second Tier Subs, despite the general contractor already paying its subcontractors. If the general contractor properly files the Commencement Notice and a Second Tier Sub files its own lien on the project, the lien amount is limited to the amount the general contractor owes the first-tier subcontractor for the project. By limiting the claims of Second Tier Subs, the general contractor will be in a better position to collect more on its lien and not have to split as much of the payout with the Second Tier Subs.
But, don’t you worry, Second Tier Subs—there is also a way to protect your interests and get the attention of the general contractor and project owner. The Notice of Furnishing Labor or Materials (“Notice of Furnishing”) can only be filed by remote claimants (i.e. Second Tier Subs). The Notice of Furnishing also must be filed with the Register of Deeds and should include the same type of information required in the Commencement Notice. But, unlike the Commencement Notice, the Notice of Furnishing must be served on the general contractor by certified mail, return receipt requested, to provide proper notice to the general contractor. Once general contractors receive it, they are on notice that there is another mouth to feed.
It is critical to take the proper steps in filing and “perfecting” mechanic’s liens. The owner’s property can only be levied as collateral for a limited amount of time. Those laws protecting your right to payment can quickly vanish within a blink of an eye . . . well, 90 of them, that is.
For instance, in South Carolina, if you do not record and perfect your mechanic’s lien within 90 days of the last day that labor or materials were furnished on the project, then you lose your right to lien the property as your primary source of collateral. See S.C. Code Ann. § 29-5-90. Further, the clock doesn’t stop ticking if a different party performs work on the project. It is dependent on the party intending to record a lien. Also, warranty work and repair work typically do not restart the clock. In North Carolina, you have 120 days from the last date of furnishing to file your lien.
Perfecting a mechanic’s lien requires some time, so it is best not to wait until the last minute to begin this process. In order to perfect your mechanic’s lien, you will need to do the following:
1. Record a “Notice and Certificate of Mechanic’s Lien” with the Register of Deeds office in the county where the property is located;
2. Record a “Statement of Account,” where you swear under oath to the amount owed for the labor or materials;
3. Enclose a legal description of the property subject to the lien within the recordings (usually found in the property deed);
4. Provide a verification that all of the aforementioned materials are true and accurate; and
5. Serve all of these documents on the owner of the property.
If you fail to check any of these boxes within the required time frames under state law, then those lien rights and the ability to recover attorney’s fees can no longer be “liened” on. Should you have fears of an owner, general contractor, or even subcontractor withholding money owed to you regarding a project, we strongly recommend you consult with a seasoned construction lawyer immediately to make sure your business is set up properly and that you can invoke the protections of a mechanic’s lien should you ever need them. If we can help, please don’t hesitate to contact us here at Kenison, Dudley & Crawford, LLC.Read More