You’ve worked incredibly hard to build your business and make it successful. You’ve invested in the knowledge, skills, experience and opportunities that have come your way, and the end result is a profitable business with happy customers and honest, hard-working employees. So, what are your plans for the future?
All too often, successful businesses disappear when the founder does. This can be because of a sudden, unexpected catastrophe or simply because of a lack of succession planning. In either case, too few equipment rental business owners focus upon their exit strategy until it’s way too late. This means the value of their business is severely undermined by taxes or penalties, and what they leave behind is far less than what they hoped.
Smart succession planning is a long-term project, but the end result is well worth it. Let’s look at some of the long-term goals you need to set and decisions you need to make and some of the issues that arise.
How will you be involved in your business in the future? In terms of your involvement in the business, sometimes the hardest part of succession planning is letting go. You’ve invested your life in growing the business, so it’s often very difficult to simply walk away. How active you remain in the business might also depend upon what the business needs to maintain success. Your relationships with vendors, customers and others are critical assets of the business, and you might need to stay involved until your successor can nurture those relationships.
How much money do you need to retire? For retirement planning purposes, you need to consider the income stream you need in the future and evaluate your current portfolio of investments. You might also look at long-term legacies for descendants and how those will be funded. All of this will affect whether you want to “cash out” completely, take a structured pay-out, remain an investor, “finance” the sale of the business, etc. These choices have important tax and financial consequences.
Who will run the business when you are gone? The goal-setting process might necessarily involve consideration of the future of others. In a family business, you’ll want to take into account the goals and future of key family members involved in the business. If you’re “grooming” a family member to take over for you, that person’s goals and expectations will clearly be a key factor in the decisions you make about long-term strategy.
You will also want to consider the impact of your departure upon key managers and employees and what their goals for the future might be. It’s always a good idea to involve partners, managers and key employees in the succession planning process so that no one is surprised by your withdrawal from the business or how that changes the business and its operations.
What legacy do you want to leave behind? In addition to your personal goals and consideration of the goals of others in your business, you’ll need to think of the business itself. If you plan to sell the business and walk away, management succession might be unimportant to you and the concern of the future owner, but for most small business owners, who runs the company going forward is a very important concern. Most founders care deeply about the future of employees, customers, the company’s goodwill, the owner’s name, and especially family members still involved in the business.
Next, you’ll need to assess the skills of your current management team to ensure they’re capable of assuming control. If not, consider what training they need. If you plan to bring in an outside successor, you will want to prepare your current managers and employees for the transition. You will still need to assess the successor’s skill set, so you can prepare and train the successor as necessary and involve existing managers in that process as well.
Once you’ve identified your personal and business goals, make a list summarizing your financial objectives, future ownership/structure of the business, chosen successor and key managers, your future involvement, and any special considerations. This list will be invaluable to the experts you will need to consult to implement a succession plan.
Planning for the transfer of your business
When planning the transfer of your business, you’ll need input from a variety of experts and resources. In most cases, this will include an accountant, tax advisor, financial planner, insurance broker and/or legal counsel. These experts will help you pick the best tools for achieving your goals.
What is your business worth? Generally, a good CPA or business appraiser can provide a pretty accurate valuation or your business today and in the future. This will help determine the income stream for your retirement or other long-term goals. You might discover the business is not worth enough, in which case, you’ll want to explore ways to increase the value of the business.
Consider legal options for transferring wealth and control. The legal options will depend in part upon the goals and objectives you identified earlier. It’s vital to have legal counsel for tax and estate planning purposes at this point. Following are some examples of plans and tools you can use.
The simplest tool is outright sale or liquidation of the business, although it often is done through an installment purchase agreement. This permits a gradual withdrawal and transition of the business to the new owner, which in turn, helps ensure the business remains viable long enough to meet the installment payments. Unfortunately, sometimes there’s no buyer on the horizon, and the business is liquidated for whatever cash the owner can get. In the case of sale or liquidation, there really isn’t a succession plan, although there might be some contracts and/or agreements for sale of assets, inventory, etc.
If you want to keep the business “in the family” there are several ways to do this. You could choose to pass ownership to your family but either groom or hire someone to manage the business in your stead. The ownership interest can pass through gifts, by establishing trusts, or by selling shares of the business directly. You might also choose to use equity in the business as an incentive for key managers or employees, while retaining majority ownership in family members or trusts controlled and directed by family members.
If there will be a small number of shareholders, buy-sell agreements can be a useful tool. Generally, these provide that if/when an owner wants to get out of the business, the remaining shareholders or the company itself is given an option to purchase the departing shareholder’s interest. This helps preserve continuity of ownership and also provides funding for the departing owner.
For a well-established small business, a management buyout can transfer ownership with the confidence of continuity of management. Here, the owner sells to existing managers who acquire percentages of the business equity. Often, they’ll want to put buy-sell agreements in place to preserve their own ownership interests. In some buyouts, the seller is paid over time and maintains an active, although gradually decreasing, role in the ongoing business.
A less “hands on” approach is a sale to all the employees through an Employee Stock Ownership Plan (ESOP). This is helpful where individual managers would not be able to afford to buy-out the owner or where the owner wants to disengage more quickly and be paid in full. This mechanism also provides incentives to employees to make the business a success in the future.
Set a schedule and communicate your intentions to all affected parties. This will usually include family, partners, managers and employees, but you’ll also want to include communications to customers, suppliers, government entities, etc. In most cases, you’ll want to transition your business relationships to your chosen successor, as you get closer to your target date.
Note that you should periodically review your succession plan to make sure it will still meet your needs and expectations. Changes in your personal situation, e.g., marriage, divorce, grandchildren, might suggest modifications to your plans. Similarly, major changes in business operations or revenues might also suggest the need for plan revisions. Finally, the plan should be reviewed at the outset and periodically by competent experts to make certain that changes in laws have not affected the plan objectives or assumptions.
Through thoughtful advance planning, you will be able to ensure that your success lives on. Take some time to enjoy it.