To help business clients steer clear of some of the worst missteps, Stephen Klein, a CPA and partner with New Jersey-based Klatzkin & Co. LLP, put together a list of the 10 biggest value-destroying mistakes he has in his 40 years of working with closely held and family-owned businesses.
Being proactive and taking the necessary steps now to avoid these mistakes will help owners to increase the value of their business while protecting their interests and securing their future, Klein said.
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Mistake No. 1: Not thinking about a sale -- today.
Mistake No. 2: Not planning for trouble.
Klein suggests preparing a short memo and giving it to a spouse or family members that includes at a minimum whether the business should be sold to family members, key employee(s), an outsider, liquidated or continue to be operated. Owners should also indicate which of the employees are capable of running the business.
Mistake No. 3: Having the wrong entity status.
Mistake No. 4: Bad accounting.
Mistake No. 5: Mis-reporting income and expenses.
Mistake No. 6: Having too many eggs in one basket.
Mistake No. 7: Being indispensable.
Mistake No. 8: Not having an ownership agreement.
Just as important, Klein says, is that co-owners should review the agreement annually and agree on the current value of the company each year, as well as reviewing the buy-sell insurance policies to see that they are sufficient to cover all or a substantial portion of each owners interest in the business if their interest had to be purchased.
Mistake No. 9: Not having written policies and procedures.
Mistake No. 10: Not having an exit plan early on.
Business owners should engage a professional advisor who specializes in succession and exit planning to work with them and their advisory team (e.g., lawyer, CPA, investment advisor, etc.) to come up with a tailor-made exit strategy.