Ideally, business owners should have a plan in place at least three to five years before the date their completed transition is to occur. When transitioning to “insiders” (key employees or family), we recommend five to nine years. The following three recommendations should assist you in getting started.
As business owners approach retirement age, the question begs to be asked: What will happen to the businesses they own and operate when they are no longer involved? Studies suggest that as many as twothirds of all small and midsize businesses are owned by individuals who plan to exit their companies within the next decade. Yet fewer than one in five is prepared and has a written succession or exit plan. While retirement typically is the impetus for a business owner’s exit, other unforeseen events or circumstances – such as an illness or an accident – could precipitate an untimely departure. Planning for the inevitable exit will always result in a better outcome. In any instance, business owners generally want to maximize the business’s value, minimize the tax burden, and contain risk. Three important steps can help business owners move toward accomplishing those objectives.
A succession plan ideally should be a part of a business plan. If it’s not, then a plan should be in place no fewer than three to five years before a planned exit from the business.
Begin by considering a series of questions about future needs and desires, including:
- When do you want to exit?
- How much money will you need to exit?
- To whom do you want to transfer the business?
- How much is your business really worth today?
- Do you have a strategy to increase the value of your business between now and your target exit date (if that’s a requirement)?
- Do you know how to structure a sale or transfer to a family member or key employees to reap the greatest benefit, net of income taxes?
- Do you have contingency plans to enable your business to continue and provide for your family if you are unable to do so yourself?
Once you know the answers to those questions – or at least to most of them – you’re well on your way to being able to complete a plan for a successful exit. However, if you’re having trouble coming up with the answers, you could find yourself making a hasty exit without being able to accomplish all your objectives.
CONSULT AN ADVISER
The tried-and-true techniques that brought you business success – such as learning from mistakes, developing a strategy based on experience, and simple trial and error – do not apply when developing an exit strategy. You’ll sell or transfer your business only once, so it’s important to make the most of the opportunity. That’s why you should consider consulting an adviser who specializes in business succession planning.
Advisers have the experience that others don’t; they draw on what they have seen and learned while observing the failures and successes of other business owners in similar situations. An experienced adviser can help a business owner develop a plan that makes the most of the transition and helps avoid costly mistakes.
PUT IT IN WRITING
As with any other business plan or deal, a succession plan needs to be put in writing to ensure that it is carried out as desired. The plan should include specific recommendations for the sale or transfer of the business, such as the desired buyer or receiver of the business, as well as the desired structure of the transaction.
Ensure that your exit plan includes a checklist that provides a step-by-step plan of action to assist with implementation and monitoring. To keep your plan on course, the checklist should detail each action that must be taken, the individual or entity responsible, and a due date for the action item, and the plan should be reviewed at least annually, and adjusted for changes in circumstances that arise.
Owning and operating a business requires a significant investment of time and energy. Protect the investment and take the necessary steps to optimize your exit and leave the business – and its continuation – on your own terms.