Transitional Planning
Ultimately every business owner will have to hand over the business they spent the better part of their life building to someone else. Planning ahead will ensure you get exactly the outcome you desire. So how far ahead should you plan? Years ahead, in most cases!
What, exactly, is a transition plan?
A transition plan is the process of planning your exit, in writing - outlining options and strategies. Transition planning, although seemingly straightforward, involves many factors, but in the end will give you a road map to help accomplish your goals. The last thing you want to hear is that when it’s time to retire/exit, you can’t afford to do so.
Some questions to consider before you start drafting your transition plan include:
When are you going to retire?
Will you play any role in the business after you have retired?
If you planning to sell your business, who will buy it?
What is your business worth today and what will it be worth when you sell it?
While there are many ways to exit a business, here are three of the most common options.
Leave The Company To Your Children
It’s every business owner’s dream – you have built up the company and now you are going to turn over the keys to your children. Sounds perfect, but have you invested enough money to simply hand over the business? If not, how are your children going to pay you for the business – outside investors, bank loans, a seller notes, cash flow? Are your children involved or even interested in the business? How do you keep it fair if one or more children are involved but others are not? Clearly, family dynamics present a number of considerations.
If the business suffers, are you prepared to step back into an operational role? Can you really retire if the family still owns the business? If they fail, does your retirement get postponed or cancelled? Most business owners don’t think about these issues until it is too late.
Ultimately, you need to ensure that you, the business owner, can walk away from your business with enough income to live the way you want. Your children very likely have their own interests. Unless you are financially set, have only one child and they are already involved in the business or have made arrangements for all of your children, we usually advise business owners to consider selling the business to a third party.
Sell the Company to Your Employees
What better way to reward loyal employees for their hard work in helping to get you to this point than by selling them the company through an Employee Stock Ownership Plan or ESOP. Unfortunately, many of the same issues that arise in leaving the business to your children crop up with an ESOP as well. How do the employees actually pay for the company? Usually, this involves leveraging up the company as much as possible with bank debt and then you, the owner, carrying a note for the remainder of the purchase price. Do you have the financial security to accept a note? Can the company function and continue to grow under this debt or is it handicapped? While ESOP’s have their place, because of these and other issues, they are far less common than you would believe.
It’s not particularly easy to transfer the business ownership to your family or key employees, and there’s a significant amount of risk – both to you and the business itself. Ownership transition also determines the value of the business. Most owners tend to believe their business is more valuable than a valuation reveals. In addition, a business is worth more when sold to a third party than when sold to a family member or member of key management.
Sell Your Company To A Third Party
Ultimately, most business owners decide to put their company up for sale to a third party. If, like most business owners, most of your net worth is tied up in your company, this is usually the option that makes the most financial sense. But how to proceed? Is your company ready to be sold? What, exactly, does “ready to be sold” mean? What are buyers going to focus on? Who would be interested in purchasing your company? How do you know you are getting a fair deal? The questions are endless and it is, quite frankly, an onerous process for most business owners. Luckily, there are professionals, like the staff at CGK, that can help you with this process. Selling privately held businesses is what we do and we will facilitate the entire process from preparing your company for sale all the way through closing the transaction.
The biggest mistake that business owners make is trying to handle the sale of the company themselves. Occasionally they pull it off. More often than not, however, business owners find that the sale process demands so much of their time that the core business begins to suffer due to lack of attention.
Do you know who you are beyond your business? If you don’t know what’s next, chances are you’ll dig your heels in and resist the process. Too often, business owners spend their time working in the business rather than on the business. When it comes time to plan for transition, they are often shocked at the amount of work involved. Bottom line, start early and utilize professionals to help you through the process! It’s always the right time to ensure the prosperity of a business you spent the better part of your life building.