The Importance of Succession Planning
Ownership of a business often represents years of hard work and entrepreneurial skills. However, even the most astute business owners are often unfamiliar with the complexities and levels of preparation that must go into a successful succession strategy.
Whether you are contemplating transferring your business interest to family members or selling to current management or an outside party, there are several decisions to make and complex issues to address.
Common considerations include:
- What do you want for the stakeholders (yourself, family members, employees, the business itself)?
- Which transaction structures are relevant to your circumstances and goals?
- What are the tax implications of the various alternatives?
- What is the business actually worth?
- What can you do to maximize transaction value?
To answer these questions, it is beneficial to assemble an advisory team — regardless of the size and complexity of the transaction. Generally, the team includes legal counsel, an accountant, a financial advisor, a business appraiser, and an investment banker or business broker (unless transferring the business to your family). Keep in mind, each of the members of the support team should be well versed in the exit-planning process and may not be your historical advisors.
Ideally, you should start planning for the exit transaction at least two years in advance. While this may seem like a long time, there are several stages required to maximize the business value and increase the likelihood of a successful transaction.
For example, this time is used by the support team to understand your personal vision and objectives, discover the baseline state of the business, and develop and execute a prioritized action plan for the business and the owner to build transferable value. The more time available to execute the action plan the better, as the improvements compound over time.
It takes serious time and financial commitment to do it right, and you do not want to rush the process. There are serious consequences in attempting to transition if you are not prepared. The likelihood you will be one of the owners who profoundly regrets the exit decision is very high. The value of your business at the time of exit will not be maximized, and you will not be financially prepared or personally prepared for what happens after the transaction.
All things have a beginning and an end, and it is every business owner’s reality to eventually transition the business they built. Whether that is to your family, your employees, management, or some third party, you can take action today to prepare for the future.
We invite you to contact us if you want to learn more about the business, personal, financial, legal, and tax implications involved in transitioning a privately owned business.