Help ensure a successful future for your business with a succession plan
All too often business owners get so bogged down in the daily grind of running their companies that they fail to adequately plan for their futures. But not planning for the inevitable can place your business on the endangered species list and significantly affect your financial future. One of the best things you can do now to help ensure a successful future for your company is to develop a succession plan.
A well-thought-out succession plan will help you pass on responsibility for running the company to a successor, transfer ownership and extract your money. Let’s review some of the decisions you’ll need to make and the criteria to consider when setting up your succession plan.
Keeping it in the family
You’ll first need to ask whether you plan to transfer the business to a family member or someone else inside the company, or sell it. If your children are involved in the business or there’s another logical successor — someone who, with a few additional skills, could fill the seat behind your desk — you should start grooming that person as early as possible. Depending on the amount of support and knowledge your prospective replacement needs, this may take several years or just a few months.
Because business succession and estate planning are generally linked, make sure you consult with us and your financial advisors to help you create the transfer plan, fund your retirement, and build an estate plan that equitably divides your wealth among family members who participate in the business and those who don’t.
Setting the price
If none of your family members are qualified or want to assume the mantle, consider:
Selling the firm to your employees through an employee stock ownership plan (ESOP),
Setting up a management buyout, or
Selling to an outside buyer.
Each of these options has its pros and cons. The first two options save you the time and expense involved in finding an outside buyer. On the other hand, if you can find the right outside buyer, you may be able to sell your business at a premium.
To do so, you’ll need to start preparing. Begin by upgrading your business processes, with special emphasis on financial management and reporting. A well-run, efficient business will command the highest price.
Next, determine the market value of your business. This may require the expertise of a professional who specializes in business valuations. Your valuation expert will assess your business’s tangible and intangible assets and project future revenue. Valuation professionals can help you decide whether it makes sense to sell your business intact or sell individual assets piecemeal.
Off to market
When you’re ready to put your business on the market, develop a list of possible buyers, such as your competitors and business associates. Once you’ve identified a few buyers, formulate a plan for marketing your business to these groups.
While you can personally approach potential buyers with whom you have an established relationship — for example, partners, business associates and employees — you probably should enlist the assistance of merger and acquisition specialists such as business brokers and investment bankers to act as a go-between with other types of buyers. These advisors can guide you through the often lengthy and complicated sale process.
Consider the tax costs
Although you may think that, once you’ve chosen a successor or found a buyer, you’re home free, think again. Make sure you meet with us and your accountant to discuss the tax consequences of the transfer or sale, which can have a major impact on the transaction’s success or failure.