Business ownership transition is one of the most ignored aspects of owning and operating a business, but it is the most critical in terms of realizing an owner’s personal retirement goals and continuing a successful business for future generations. Similar to any other internal business process, an ownership transition plan must be carefully designed and crafted to address owners’ and firms’ specific needs and desires. If a succession plan for a business is not developed and implemented, it may mean liquidation of the business and its assets upon the retirement, disability or death of the owner(s). Liquidation often results in the lowest value for the business and can have devastating effects on owners’ families and the employees of the business.
Begin the Planning Early
The sooner you can decide how you want to transition your business ownership, the sooner you can implement planning to effectuate the transition at the desired time. Typically, succession options include 1) gifting your business to your children; 2) selling and/or gifting your business to one or more key employee(s) and/or other owners of the business; or 3) selling your business to an unrelated third party.
Make the Decision
A thorough evaluation of all options, coupled with a deadline (often nine months to one year) to complete the succession plan, can assist a business owner with determining how best to transition ownership. For an owner whose children are not involved or are not capable of taking over the business, often transfer to a key employee or a third party sale are the best options. For owners interested in selling the business to a third party, timely planning may help to identify a strategic buyer, such as a supplier or a related business partner. For those owners set on transferring the business to their children, early implementation can help take advantage of annual gift exemptions.
Business Valuation
Once a decision is made as to how the business will be transitioned, knowing the value of the business will help when creating a succession plan. A realistic, third-party valuation of the business can help with all available transition options. For example, once the value of the business is known, a sale for a minimum acceptable price can be pursued along with an appropriate buyer based on the desired sale price. Or, if the business is being transitioned to one or more key employee(s), an employment agreement and/or shareholder or operating agreement can address the terms of transition, such as through bonus or stock options. For transition to family members, gifting and/or discounted transfers can be considered based on the value of the business.
Financial Aspects
Along with business valuation, other financial aspects of business succession are important to consider, including how the transition will be funded. While sale to a third party is often funded solely by the buyer, this may not always be the case (for example, the sale of dental practice). If the business is being transitioned to key employees or other owners of the business upon the death of an owner, key man life insurance can be purchased by the company on the life of that owner. The proceeds of the life insurance can then be used to purchase the deceased owner’s interest in the business from the estate of the deceased owner.
Communication is the Key
Once a business succession plan is established, one key aspect to proper implementation is good communication. If an owner’s children and/or key employee(s) will be taking over the business in the future, proper communication to key employees, other children, etc., can greatly assist with a smooth transition. Cultural transition may be difficult or resisted by key personnel and the sooner the succession plan is made known and implemented, through leadership roles in the company or otherwise, the greater likelihood of a successful transition. Additionally, at some point in the succession process, it may be necessary for a transitioning owner to walk away from the day-to-day management of the business, and allow the future owner to operate the business (even while the transitioning owner maintains an ownership interest in the business).
Reassessment of the Plan
Once a business succession plan has been created and implementation has begun, it is still necessary for the transitioning owner to continue to evaluate the plan and ensure the owner’s objectives for the transition are being met. A succession plan is not etched in stone — economic conditions may change and key personnel or family members may change their minds about their continued involvement in the business. However, review and reassessment provide a transitioning owner the ability to proceed in a different direction as circumstances require.
Transition of ownership of a business, or succession planning, is complex and difficult for several reasons ranging from emotional, to financial, to procrastination and other factors. Time passes quickly and, if business owners and key employees are not developing and implementing a business ownership transition plan now, time is not on your side.
