The day-to- day demands of running a business can make it difficult to think about the future. And by “future,” we don’t mean how your tax liability will look at year-end or how you might grow profits over the next decade. We’re referring to the future in which you don’t own your company anymore.
Succession planning is an important activity for every business owner. Moreover, it’s never too early to start thinking about the general concepts involved. Here are three key succession planning factors to consider.
1. The family – You’ll first need to ask whether you plan to transfer or sell the business to a family Member or someone else inside the company, or sell it to an outside party. If your children are involved in the business or there’s another logical successor — someone who, with good training and sound business experience, could fill the seat behind your desk — you should start grooming that person as early as possible. Depending on the amount of support and knowledge your prospective replacement needs, this may take several years or just a few months.
Remember, succession planning and estate planning are generally linked. So you’ll want to create a clear, legally defensible ownership transfer plan while you also fund your retirement and formulate an estate plan that reasonably divides your wealth among family members who participate in the business and those who don’t.
2. The buyer – If none of your family members are qualified or want to assume the mantle, there are a number of ways you can transfer ownership of your company to a buyer. Who might that buyer be? There are various answers to this question. The buyer could be your employees. Selling the company to them through an employee stock ownership plan (ESOP) is an approach used by a wide variety of businesses.
There are also somewhat less complex options. You might set up a purchase via an internal buy-sell agreement — making your management team the buyer. Or you could simply sell to an external party, such as a private equity firm. Each of these options has its pros and cons. An ESOP or management buyout can save you the time and expense involved in finding an outside buyer. On the other hand, if you can find the right third party, you may be able to sell your business at a premium.To do so, you’ll need to start preparing.
Continually upgrade your business processes, with special emphasis on financial management and reporting. A well-run, efficient business will carry less risk and command a higher price.
Next, regularly estimate the market value of your company. Doing so will likely require the expertise of a professional business appraiser. The right expert will assess your business’s tangible and intangible assets and project future revenue. Appraisers can also help determine whether it makes sense to sell your business intact or sell individual assets piecemeal.
3. The market – Some company owners overlook this factor. When you’re ready to put your business on the market, will there be a market? Are mergers and acquisitions relatively common in your area or are they infrequent? In short, will you be able to sell when you’re ready? Start developing a list of potential buyers, such as competitors, business associates and private equity firms, now. Once you’ve identified a few, formulate a plan for marketing your business to them. You may need to enlist the assistance of merger and acquisition specialists, such as business brokers and investment bankers, to act as a go-between with certain types of outside buyers.
Again, these three factors are fairly general in nature. There will be many specifics regarding your company that you’ll need to cover in your succession plan as you get closer to retirement or whatever you intend to do after leaving the business. So be sure to involve your financial and legal advisors in this critical process.