Succession Planning: A Guide For Business Owners

Jason Thompson

By: Jason Thompson - Partner, Sponsel CPA Group

Categories: Financial Planning, Personal Finance

One of the unfortunate consequences of the Great Recession is that so many business owners were focused on the survival of their company, they put off long-term planning - including an exit plan for when they want to retire or sell their business.

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In my experience, those who have most successfully transitioned to the next stage of life went about planning their future in a very deliberate way.

The first step is to start a dialogue – with your family, your business partners and your own thought process. It's best to begin succession planning five to 10 years out.

Much of the time, business owners have the bulk of their personal wealth tied up in the business, thinking that would be enough to fund their golden years. But you need to define financial freedom: How much money will you need? How can you best extract that value from the business and turn it into income-producing assets during your retirement years?

If yours is a family business with multiple generations of ownership, it's vital to communicate with the next generation as early as possible to explore if they're interested in acquiring the business.

You also need to think about selecting the right leadership team to ensure a smooth transition. One of the keys to making a business more valuable is to have the right human assets, talent and skillsets already in the company at the management level.

Think about it from a buyer's perspective. If you knew most of the key managers who helped build and run the business would leave after the transaction, or if the current leadership seems inept without daily guidance from the current owner, it will seem like much more of a challenge to take on.

As a result, they won't want to pay as much.

The first priority should be in the "C-suites," the highest-level executives: the CEO, COO, CFO, CIO and so on. But don't ignore the lower levels of management. It's smart to take a really hard look at the organization chart in a strategic manner, and think about who might be ready to retire or move on – and who their replacement might be.

In terms of the actual transaction, the first thing to determine is what type of sale it will be: a total outright deal for the entire enterprise or a portion of the equity. Typically an outright sale occurs when the owner(s) is looking to retire or start an entirely new venture. If they want to stay involved but move out of the hot seat of leadership, they might choose to sell only a part of their equity.

The next question is to whom the business will be sold. While sales to an outside party or family member are common, other possibilities include a buyout by the current management, merger with another company, acquisition by an Employee Stock Ownership Plan (ESOP) or a similar vehicle in which the employees become owners.

Part of any successful exit plan it to gather a team of advisors who will help the seller facilitate the transaction in a way that meshes with their objectives. This team can include legal counsel, accountants, a business broker who finds a buyer, insurance professionals and others necessary to properly effect the transition in an efficient manner.

In our experience, a very small percentage of business owners walk away with a lump sum. In most cases, it's less than 5 percent of the purchase price. So it's important to establish terms of payment, time frame -- it's better to keep it short -- and an interest rate.

Once you have your liquidity and/or payment plan in place, the next step is for you and your family to take a hard look at what to do with these funds, both in terms of investing the proceeds and passing it on one day. This means comprehensive estate planning and picking the right team for wealth management to help you invest the money.

Finally, start thinking about what shape you would like your life to take post-sale. People who run a company often experience the hardest transition to retirement. They miss that sense of people coming to them for their opinion and leadership.

The advice I give to clients is to find something that brings them fulfillment, and pursue that with the same zeal they had for business.

It can be a hobby, working with charitable organizations or anything else they're passionate about. The key is to recognize this stage of life as the start of a new chapter rather than the end of the old one.

Jason Thompson is partner, director of valuation and litigation services Sponsel CPA Group.

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