Business succession planning may be uncomfortable, but it’s critical
By Melissa D. Bane, CPA, PFS, CFP, ChFC
Exiting a business is something most entrepreneurs prefer not to think about. Perhaps because doing so forces them to think about their mortality, or because the business is “their baby” and no one else can run it like they do, or maybe it is part of the “invincible” fabric that drives the entrepreneurial spirit. Having a well-thought-out exit strategy is essential for those who want to realize the full value of the investments they have made in their company.
Unfortunately, many small business owners have no exit strategy in the event of their disability, retirement or death. According to the Conway Center for Family Business, 80 to 90 percent of U.S. businesses are family-owned; however, less than a third of them succeed into the second generation. Only 10 percent survive into the third generation. (Harvard Business Review, January/February 2012)
If you are a business owner, ask yourself these questions: If you retired, became disabled, or even passed away, today, who would own and manage your business tomorrow? Have you made the necessary plans to protect your family and position the business for a successful future?
When it comes to business succession planning, there is no one right answer for everyone. Developing the proper exit strategy is a big task that has implications for your employees, your business structure, your assets and your tax obligation. Few events affect the employees, suppliers, customers, creditors and family of a small business to the extent of an owner exiting the business.
The type of business entity will affect the design of your exit strategy. Whereas sole proprietors can decide by themselves whether or not to close up shop, partnerships, limited liability companies (LLC) and corporations must work with co-owners in making this decision. Partnerships, LLCs and corporations should have addressed the issue of dissolving the entity in guidelines established through the articles of organization or other operating agreements.
Another important question to consider is whether you want your business interest retained by a family member, sold or liquidated. Transferring ownership of a family business to a new generation is complicated and can lead to additional tax implications, such as estate and gift taxes. Perhaps you are considering an associate at your company who has been your “right hand” or “go-to” person. This does not mean he or she is the right person to succeed you. Whether family member or internal associate, successful leadership transition requires broad preparation and mentorship across many levels, both mental and emotional.
Should you decide to sell or liquidate your business, you should consider having a business valuation performed to estimate the economic value of your interest in the business. Three different approaches are commonly used in business valuation: the income approach, the asset-based approach and the market approach. Each technique has advantages and disadvantages. Securing the services of a valuation professional is highly recommended. Although the financial numbers are a primary concern, potential buyers often look beyond the spreadsheets to the quality of the employees behind the numbers. It is important to begin mentoring employees and filling potential talent gaps with people who share your enthusiasm for the business.
You may have spent a lifetime building, protecting and driving your business forward through challenging times. Selling or transferring a business is a complicated, multistep process that may be one of the most difficult tasks you face as a business owner. It is highly recommended you work with legal, accounting, tax and financial professionals who are experienced experts in the area of business succession planning. Doing so will help ensure a seamless transition when the time comes to exit the business.
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[/ezcol_1third] [ezcol_2third_end id=”” class=”” style=””]Melissa Bane serves as the private client advisor for Greenwood Capital Associates. Her expertise includes financial, tax, insurance, retirement and estate planning, as well as strategic plans for medium-to-high net worth clients.[/ezcol_2third_end]
