Credit: Shutterstock photoMost business owners agree they must plan to pass on their business. Most business owners also admit they have no such plan. How to make sure you do have such a plan?
According to Manufacturing & Technology eJournal , "An estimated $6 trillion of personal wealth will be transferred over the next 10 years consisting primarily of privatively held or family owned businesses. Once the founder is gone too often the family business gets squandered away."
(This is the second of two articles looking at succession plans for small businesses.)
My grandfather sold his patented cleaning solution door-to-door to business owners. He was a successful entrepreneur. Then a car killed him while he was crossing the street. My family squabbled over running the business, fired executives who ran it better and eventually sold the company for a pittance.
Key to the collapse: My grandfather failed to implement a succession plan for his business and patent. A business owner can avoid many of the pitfalls my family faced simply by planning ahead.
The planning takes time and work, and you need the right, expert team in place. You need a corporate attorney, an estate planning attorney, a certified public accountant with vast experience with business owners, and possibly a valuation expert and a wealth manager specializing in the unique needs of business owners.
These experts help you pay attention to four aspects of the business:
· Maximizing the value of the company;
· Planning for the foreseeable issues;
· Planning for unanticipated catastrophic events; and
· Planning to reach your future goals.
Within these categories are specific areas needing your attention:
Tax mitigation. Some techniques help reduce or even eliminate tax , such as a Section 1031 exchange transaction to trade one property for another and avoid federal income tax, or a charitable remainder trust to disperse taxable income to beneficiaries and donate the rest.
Lowering risk. The longer you wait to plan, the higher your risk. Many events may occur as you wait, including death, disability and divorce. Your future options narrow every day you put off planning. By planning ahead you control more of the succession process.
Value enhancement. Disability or death before the plan's implementation often damages the business, which in turn loses much of the value.
Different exit strategies meet different objectives for entrepreneurs. Sale to a third party fits owners who want to monetize some or all of the equity in the business. Sale to a strategic buyer, who may look to beef up their own operations by adding your company, usually results in a higher payout and quicker exit. A sale to a financial buyer with cash may result in a lower payout and a slower, more transitional exit. Transfer to a family member works when leaving a legacy matters more than maximizing the value of the business on exit.
Sale to a management team or management buyout (MBO) can provide a quick, confidential exit at a fair price, though likely not the highest possible. Equity or debt, or both, finance this strategy, since capital providers like to see a management team staying invested in the company.
Most entrepreneurs hold a liquidation/windup , or the sale of a company's assets to settle outstanding accounts before the company dissolves, as a last resort. Unfortunately it happens more than most realize.
Defining your succession process involves several steps:
Set your goals from both from the owner and the family member standpoint. Get the family actively involved. Realize that often family members live a lifestyle they may not have the money to keep up after a sale.
Determine likely management succession. If the succession is family oriented, will key management work for the other family members? If the company sells, will a new management retain existing supervisors and other employees?
Implement the plan. Many times, completed succession plans just sit ignored and forgotten on a shelf. Your expert team helps ensure the plan's development and implementation.
Your exit plan should include three objectives: personal financial security; maintaining harmony within the family; and getting maximum value for the business. Don't end up like my grandfather and his family. Plan now.
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Scott Thompson is the co-founder of Bridge Business Consultants ( BBC ). BBC is a consulting firm that specializes in helping business owners and certified public accounting firms recognize tax incentives and realize expense recovery. BBC also specializes in business exit planning and has been recognized by The Wall Street Journal for their Business Exit Solutions. Scott is a certified specialist in Retirement Planning. Laura Thompson (co-founder) is a CPA and certified specialist in Estate Planning.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
