Too many owners are so focused on growing their businesses that planning for retirement and succession is put on the back burner. According to the FPA/CNBC Business Owner Succession Planning Survey, 78% of small-business-owner clients plan to sell their businesses to fund their retirement, yet fewer than 30% of these owners have a written succession plan. We have personally worked with the families of owners who have become disabled or passed away unexpectedly, and have seen the struggle and stresses that they must endure to ensure that their businesses do not liquidate for a fraction of their previous value.
Few owners want to intentionally saddle their heirs with cleaning up a financial mess at a time when they will be trying to recover emotionally from the loss of their loved one. However, this is exactly what will happen if you don’t have a business ownership transition plan in place. If there is no one designated to run and purchase the business, heirs may have to sell or liquidate at a greatly discounted value to gain access to cash.
Having a transition plan or strategy will enable the business to continue under new ownership and retain its value, while ensuring a smooth transition process for the owner’s family. Let’s look at some of the most important things business owners should include as they develop their transition plan.
3 Critical Components of Your Transition Plan
Succession: Approximately two-thirds of owners transition their businesses to key employees, co-owners, or family members, while one-third sell to outside buyers. Regardless of your desired exit, there must be insiders who can run the business in your absence. A good plan will address how these insiders will be developed to keep the business operating like a well-oiled machine. Make sure to take time off and delegate duties so your successors can learn about managing the business while you are still there to groom them.
Ownership: Your plan must outline a clear path to new legal ownership. If you plan to transition the ownership to insiders, there must be a written buy/sell or other agreement that specifies exactly how, when, and at what price your shares will be purchased by your successors. If you want the business to be sold to outsiders, establish a relationship with a broker or business intermediary now so they can get to know your business and develop a go-to-market strategy.
Funding: If you want the ownership to be transitioned to insiders, there should be a funding plan to provide liquidity to your family. Best practices call for an immediate sale of the deceased owner’s shares, but if you do not have adequate life insurance, the proceeds may have to be paid to your family over time. Internal buyers may use their own personal capital, bank debt, and/or business profits to fund the purchase. The source of the funds should be determined in advance and agreed to by all parties to avoid issues.
Even if you don’t plan on transitioning out of your business for years, having a comprehensive plan in place can provide you with peace of mind, knowing that your business, your legacy, and your family’s future are secure.
By Jane Johnson, Business Transition Academy
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