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Preparing Your Succession Planning Documents

While you may not like to think about it, you need to plan for what will happen if you are abruptly unable to continue in leadership. To do this kind of succession planning, there are a variety of legal and financial documents you should have on hand at all times, whether you are actively planning for succession or it’s still in the distant future.

With help from Gary Pittsford, president and CEO of Castle Wealth Advisors, this installment of Hardware Retailing’s yearlong succession planning series will help you understand a few of the documents you should have at the ready all of the time so a transfer of ownership is smooth, regardless of when it happens. You can draw up most of these with the aid of a lawyer or accountant.

Check Your Numbers
The Cost of Doing Business Study, available from the North American Retail Hardware Association (NRHA), provides industry averages for some of your key profit indicators, such as gross margin after rebate, inventory turnover and sales per square foot. Potential buyers want to see a business that is profitable, so you can use the study to give them a perspective on where yours stands. To learn more about the study, visit nrha.org/codb.

Power of Attorney

What: General durable financial power of attorney (POA) and durable power of attorney for health care.

Why: All business owners should have these documents, regardless of when they plan to sell. They dictate who will make important decisions for the business and for your health if you are suddenly unable to do so. They don’t have to be the same person.

Avoid these mistakes: Assign a POA before you need it, but don’t neglect to update it when necessary. For example, if you change your address or get married or divorced, it’s important to update the document. Also, don’t rush to decide who you should appoint as your POA. This person will be entrusted with making major decisions if you are unable to. Make sure the person you choose is someone you would trust with your life.

Wills and Trusts

What: Revocable living trusts and wills prepared by an estate tax attorney.

Why: These documents will outline who will control your assets when you die. They allow family members to have clear expectations about how your estate will be divided after you’re gone. A well-written trust can provide some privacy over your assets and could prevent some expensive estate taxes.

Avoid these mistakes: Remember to make a provision for everything you own in your will or trust. If a beneficiary is not designated for a particular asset, then your state laws will dictate where it will go. Include life insurance proceeds, retirement plans and trusts. Also make sure the wording in the will and trust is clear. You don’t want the estate documents being incorrectly interpreted in court.

Business Letter

What: A letter written by the business owner outlining responsibilities in case of death or illness.

Why: This letter should indicate who has the authority to continue to conduct official business if the owner is unable to do so. The letter will indicate who will have authority with the bank to sign checks and deal with vendors. It will also provide all passwords for connecting with software programs and financial institutions necessary to run day-to-day business.

Avoid these mistakes: If you know who you will appoint to conduct official business, make sure that person is an official signer on your account at the bank. Passwords can (and should) change frequently, so make sure you are keeping a master list in a secure place and that a few trusted individuals know how to access them.

Financial Documents

What: Income statements, balance sheets and tax documents from the past two or three years.

Why: A new owner needs to be assured that the business will provide enough cash flow to maintain profitability. They will also use the financial statements to gauge the overall value of the business and negotiate a selling price.

Avoid these mistakes: Make sure your balance sheets are filled out properly and that you are correctly representing your assets. It’s common for retailers to undervalue their inventory, which will affect the overall value of their business. Also make sure you’ve identified those areas where you could improve your operation. As you’re thinking about ways to improve your business, focus on gross margin. Pittsford says most retailers could boost their gross margins by at least 1 or 2 percentage points. A higher gross margin will be more appealing to a buyer.

Stock Redemption Agreement

What: A contract between your business and all stakeholders.

Why: This document will control how ownership is transferred under certain conditions. Typically, it will outline what will happen to ownership in cases of certain trigger points: death, divorce, retirement, termination or disability. Creating this agreement ahead of time means you won’t be negotiating details of a buyout during a crisis. This is an agreement that needs to be in force at all times, not just when you are planning for a sale.

Avoid these mistakes: Make sure you have covered all the trigger points that could cause a change in the business ownership. Most retailers will create a plan for what will happen in case of their death, but Pittsford says retailers should also address the possibility of a disability or debilitating disease, such as cancer or Alzheimer’s.

Have a separate paragraph in the agreement that covers each of the possible trigger points, as conditions may be different for each. Make sure the price set for the company as stated in the agreement is current. Once a year, the owner should meet with the stakeholders and determine an updated price for the company, taking into consideration any recent changes.

About Jesse Carleton

Jesse Carleton has visited independent hardware retailers, conducted original research on the industry and written extensively about the business of hardware retailing. Jesse has written for more than a dozen of NHPA’s contract publishing titles, all related to the hardware retailing industry. He also was instrumental in developing the Basic Training in Hardware Retailing courses now used by thousands of retailers across the country.

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