5 Options for Business Succession

If you’re a business owner, you may soon face a challenging decision: how to approach succession. This decision affects your family, your employees, your customers, your creditors, your wealth, your financial plan and your legacy. Understand that succession will come, whether you plan it or not. Here are five basic options for business succession planning.

Close the Business

One solution is closing the business. As an owner and manager, you will at some time no longer have the health, focus, energy or interest to run the business. If the business is not well run, it quickly becomes a liability to your quality of life, to your financial stability and to your estate.

The assets of the business may be worth more than the ongoing operation and risk, especially when real estate or equipment is involved. The decision to close is often best when no employees are involved in the operations and the business depends on your skills.

Maintain Ownership, But Let Others Manage

Just because you own a business does not mean that you need to control it daily. Instead, hire talented people to manage the everyday operations and grant phantom stock or other profit-sharing arrangements to reward key personnel for effective management. You will receive the profit from the business rather than compensation as an employee. You can leave the ultimate business succession planning or closure to your power of attorney (if you are incapacitated) or your executor/trustee (upon your death).

Sell or Gift Business to Family

Family members may express an interest in owning and running the business, especially when it is a profitable business that they grew up in. But business acumen is not a genetically inherited trait. If you want your kids to become business owners, they need to develop skills, reputation, executive responsibility and a positive relationship with the team members and clients.

If you decide to gift or sell your business to your family, you need to know if you can afford to sell it for a lower value or gift it over time. Some methods allow you to transfer ownership shares over time and still maintain legal control until the last transfer. Also, you can transfer the shares of the business and still receive the dividend profits. If needed, include instructions to transfer the remaining shares at the time of your death or disability.

Sell or Gift Business to Employees

I know many business owners who have a trusted employee who they would like to have run the firm in case of their disability or death. Go ahead and talk to them about the business succession plan opportunity. By discussing the financial arrangement and eventually creating the contract, you encourage long-term retention of talent, develop greater business stability and strengthen long-term profitability. These arrangements matter to creditors and customers because they reduce the adverse financial and operational impact of your untimely disability or death.

Sell Business to Third Party

Venture capital (VC) firms and other third-party buyers will acquire a business if it has followed professional management and accounting standards. A VC firm will request a detailed valuation, a liability review and interviews with key employees to help ensure that talent, proprietary assets and customers are profitably maintained through the transition and into the future.

Business succession plans often require the founder to stay engaged with the business for a period. They also often require a combination of retention holdbacks, stock swaps with the buying entity and limits on the cash-out of the proceeds from the sale until a future date.

Key Steps to Take

No matter what choice you make, here are a few key steps you should take sooner rather than later to prepare for your business succession plan.

• Hire a competent third party to complete a professional financial valuation of the business. That way, you know what the business is valued at and how it is trending. You also have a better idea of liabilities.
• Begin the process of removing your personal financial guarantees so that the business can stand on its own credit footing. It’s especially important to inform vendors and update any contracts to avoid disruptions in delivery or trade credit.
• Inform key clients of any management transition plans to verify that such transitions will not cause customer loss. Sometimes those key clients are invaluable in planning the professional training needs of the successor employee(s) because they are aware of any mistakes that have been made.

A CFP® professional can help you think through the next steps for your business and how they fit into your overall financial plan. Find your CFP® professional today.