Making a plan for business succession
One of the most important questions a business owner may ever ask is: What’s my exit strategy?
Whether the exit is years down the road or right around the corner, a sound strategy can increase the value of the business, preserve wealth for the owner, and help ensure that the business is transferred, sold, or liquidated according to a predetermined plan.Hoping to pass it along
Unfortunately, this sort of strategic planning is sometimes overlooked. More than a third of business owners don’t have an exit strategy, according to Bank of the West’s 2014 survey of small business owners.
For many small business owners, there is an expectation that the business will remain in the family — but the majority of family businesses will not successfully transition to the next generation. According to the Family Business Institute, 88% of family business owners believe the same family or families will control their business in five years, but only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation.
One of the reasons that succession is unsuccessful is that current owners have two divergent goals: to draw out cash from the business for retirement while leaving the enough capital to operate successfully. A sound succession plan can work towards achieving both goals.Sell the business or liquidate?
For owners looking to sell or liquidate, a succession plan may not seem necessary but planning can dramatically increase the value of the business. For example, management agreements, lease issues, incomplete financial documentation, staffing problems and other factors can delay a sale or decrease appraisals.
Also, many owners underestimate the time required for a sale. We recommend starting the preparation process at least two years before the business is listed — and much earlier if the owner wants to be prepared for any unforeseen events.Basics to help with succession planning
Here are some basic considerations that can help with your planning:
- Succession plans are often done by a financial planner, in consultation with accountants, attorneys, insurance specialists, and other professionals representing the parties.
- Succession plans can help assess short-term and long-term goals, tax implications for various arrangements, and liability issues associated with ownership changes.
- Succession plans are often part of a retirement plan but can also be important in the event of a death or disability.