by Michael Iverson
Have you met a business owner who is close to retirement age and wants to sell the business? His or her life’s work is tied up in it, and the owner is unsure whether a buyer can be found. Unfortunately, he or she never developed a plan to transfer ownership of the business.
According to a recent survey conducted by PNC Bank, only about one-third of small businesses in the U.S. have a succession plan in place. Without one, a business owner probably won’t attract what he or she considers to be a fair selling price. In all likelihood, the owner will sell the business at terms stacked in favor of the buyer. Should the business owner die without a succession plan in place, it might have disastrous consequences for his or her family, such as a forced sale of the business to pay estate taxes.
The business case for a succession plan is to make sure the owner can gradually withdraw from the business on his or her terms – at a fair price and on a preferred timetable. In this article we are going to focus on three key areas that need to be considered in your succession planning process:
- Identifying a suitable buyer for the business.
- Allowing a long enough training period that assures a smooth transfer of ownership to the new owner.
- Preparing a financial plan for “cashing out” the owner without draining all of the business’s operating capital.
How to Identify the New Owner
Finding the right person to purchase your business need not be difficult, but it does require time and forethought. Trying to identify a buyer under time constraints is difficult, especially during an economic downturn. As part of your planning, write down periodically a list of possible buyers – even if you are not considering a sale just yet. The exercise is a good way to understand your options.
People familiar with your business are often the most likely buyers. Many business owners ultimately transfer ownership to existing business partners, a family member or a long-time employee. In any of these circumstances, there are benefits to the seller and the buyer(s), including:
- The seller is likely to achieve a better price by selling to a party that knows the business.
- The buyer(s) can negotiate a timetable that assures the seller will pass along valuable knowledge about running the business.
- The resulting continuity of business will benefit employees and customers.
Do you know potential buyers of your business? Go ahead and start making a list.
How to Plan a Smooth Transition
No matter who the prospective buyer may be, there are significant benefits to allowing a period of several years for a successful transfer of ownership, including:
- The current owner can provide training to the prospective buyer.
- The owner can also assess the strengths and weaknesses of the buyer, and spend the time necessary to address areas of weakness.
- The prospective buyer can be introduced to customers and interact with them for an extended period – to minimize the risk of customer attrition.
- A long transition period usually improves the financial stability of the business. And, the business’s tax accountants have a chance to plan for future tax liabilities.
A long time frame might not be warranted if the business is being sold to another company. In that case, a shorter period would be better to integrate. However, planning for the transition is still very important because the real work begins after the close of the sale.
How to Cash Out
As an owner transfers ownership of the business, he or she needs a plan for both a) funding retirement and b) leaving the business with the cash resources necessary to continue operations. In other words, writing him or herself a large check from the business’s bank account is not a solution.
Many partnerships put buy-sell agreements in place, which provide for the orderly exit of one partner. Deferred compensation plans can be established, which allow the owner to begin the transition to retirement while still collecting a salary. And, life insurance policies can be used to provide liquidity in case an owner dies before a transition is completed.
These are just a few of the considerations for any succession plan. The important thing to understand is this: not having a succession plan is a huge risk – not only to the business owner, but to his family and to the employees.
If your business doesn’t have a succession plan in place, get started today. Let us know if we can help you by calling (404) 370-6147 or sending us an email.
Next time we will talk about what can create Transferrable Value. Without it, you don’t have a business to sell.