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.