Plan Now to Ensure a Smooth Success(ion) of Your Business

Transitioning ownership of a privately owned business can be very challenging. How you handle putting a business succession plan in place, to pass your business to one or more new owners, can be a difficult task from a legal, financial, and emotional perspective. 

Therefore, if you or your clients are an owner of a privately-held business and are thinking about assembling a business succession plan, this edition of Estate Planning Matters should be of value to you.

Reasons for transition: why now?

There are a variety of reasons why a business owner may choose to sell their business. The most common reasons for ownership transfers include retirement, disability, competitive pressure, financial difficulties, health issues, lack of an appropriate family member to take over running the business, or desire for liquidity.

While business transition is a natural part of a business’ life cycle, it’s important to consider all factors when deciding the timing along with the terms of a business succession plan.

Understanding goals: an imperative step

Once you begin structuring your transition process, it is important to understand your goals and objectives.

Once you have thoroughly defined your objectives and priorities, you can develop an optimal exit strategy that will bring the most value to you and your family in the event of your disability, retirement, or death. 

Some of the significant questions you will need to ask yourself include: Will I stay on as part of a management transition team? For how long? Do I want to retain a financial stake in the business post-sale? Do I clearly understand what my personal financial needs are in the future?

Asking these types of questions requires an owner to consider the future strategic direction of the business. Whatever your decision, the only way to choose an exit option, that will best meet your financial needs after the transition, is through a clear understanding of your personal and business priorities so that you can choose the exit options that will best meet your needs.

When to Structure a Business Transition Plan 

In many cases, privately held companies are reactive when it comes to planning an exit strategy for their business. Whether it’s because they are caught up in day-to-day operational demands, or emotional resistance to letting go of the business, many business owners fail to have a cohesive transition plan in place.

Unfortunately, a reactive mode when selling a business will never yield the maximum value when compared to a proactive strategic plan. A sufficient time frame (generally, two to five years) allows time for the company and its owner to:

• Build an effective management team to ensure future stability
• Establish customer and vendor longevity
• Properly document financial records and accounting systems to maximize value to the seller and potential buyers 
• Strategically search for optimal buyers, understand their value drivers and ensure the company’s matching attributes are best positioned to maximize value
• Critically examine the company’s strengths and weaknesses and make necessary adjustments 
• Continue to run the business in a seamless manner, once the time does come for a sale, without losing value
• Plan early, which can dramatically increase the leverage a seller will have during negotiations with suitable buyers

Tips for a Successful Business Succession 

Many times, when owners becomes involved in a transition process, especially if they are attempting to run the process themselves, it becomes very easy to lose focus on the day-to-day operations of the business and value is lost.

Therefore, keeping all members of the business transition team coordinated throughout the process is vitally important.

If you or your clients are considering the assembly of a business succession plan, we recommend they you take a team approach to the process by consulting with legal, tax, and financial planning experts who are knowledgeable and skilled in properly handling business succession transactions.