Whether you are passing on the family business or you’ve chosen a worthy successor from a (no doubt) vast pool of prospects, there are a few, critical, steps you need to take before transferring business ownership. When it comes to passing on your business, many people underestimate the amount of time it takes to make the transition! According to a White Horse Advisors’ Survey of Closely-Held Business Owners, about one in six owners state that the primary reason they do not address business exit strategies is that they do not know where to get help. Patrick Ungashick, author of Dance in the End Zone: The Business Owner’s Exit Planning Playbook, calls the misconception that business owners should start serious planning no earlier than five years before they are ready to exit the “Five Years’ Fallacy.” The following blog outlines some of the unexpected factors business owners encounter while creating their business succession plan.
What is a Business Succession Plan?
Your Succession Plan is a document providing step-by-step instructions as to how to guide the company through a change in ownership.
A succession plan can be as straightforward as transferring responsibility to a more complex plan involving long-term foundational overhauls. Either way, your succession plan is unique to your goals and your business.
What are My Options for Transferring Business Ownership?
There are lots of options when it comes to the future of your business. An experienced attorney will be able to help you determine which option best suits your needs.
- Selling to a Co-Owner- Selling your share to your co-owner or partner is one of the most common methods of business transference. Both parties already have a solid idea as to the value of their shares and have a similar idea as to how they want the business to expand. It’s one of the easier business transfer options.
- Selling to a Key Employee- Passing on ownership to a Key Employee can involve several, unexpected steps and is often more time consuming than business owners anticipate. Some of the most successful successions to an employee can take years if the business owner chooses to gradually sell their share and transition responsibilities and ownership.
- Selling to an Outside Party-There are two ways an outside party can buy into your company: Cash/Financing or Leasing. Cash/Financing indicates a more straightforward buy-in. Leasing, however, introduces the possibility that your buyer can take ownership of your business for a “trial period.” At the end of the lease, the lessee can buy the business, set up a financing offer, or walk away.
- Sell back to the Company- For a company with multiple partners, you have the option to sell your share back into the company. The shares are then distributed to the rest of the owners.
- Passing on to A Family Member- When passing your business over to a family member, an attorney will be able to provide options for you to avoid gift taxes or estate taxes.
Although many of these options involve an exchange of funds, the manner in which you sell your share of the company varies. What are the taxes you have to worry about? What are your rights as a business owner when selling to a third party? An attorney will help you navigate these rocky roads and help you smoothly transition out of ownership.
Why is a Business Successions Plan Important?
- Peace of Mind: When it comes to your business, always expect the unexpected. Partner disagreements, unexpected growth, and death are all real possibilities when it comes to managing a corporation. A succession plan guarantees peace of mind in the event that disaster strikes or the plan changes.
- Investors: If your business has the support of investors, you need to present a solid succession plan before relinquishing control of your business. A successions plan will help maintain the support and confidence of those who are financially invested.
- A Smooth Exit: Even if everything goes as planned, your exit strategy should be as seamless and nondisruptive as possible. A succession plan will help you transfer your business to heirs or sell your business to partners, a key employee, or an outside buyer.
What is the Value of Your Business?
Conducting a business valuation has many benefits, even if you are not planning to sell your business any time soon. Keeping track of the value of your business can help you communicate with investors and even request loans.
Other Important Variables to Prepare for Transition:
- Employees: A business is comprised of many moving parts, including employees whom you care about. If changes are going to be made to the structure of the company, and that’s going to affect responsibilities or payroll information, you need to ensure the change is made in the least disruptive possible way. Immediately shift benefits such as health insurance and pensions to new ownership.
- Buy-Sell Security: Reinforcing the security of your partnership doesn’t necessarily mean you expect something bad to happen. A plan simply protects both partners in the case of an unforeseen event. So, if you have even the vaguest inkling of an idea that you might want to sell your share to your partner in the future, implementing a Buy-Sell Agreement is the best way to avoid unexpected complications during a business transfer.
- Choosing Your Successor: Whether you have chosen a partner, a key employee, or an heir, finding your desired successor is only the first step. It’s possible that he or she might reject your offer, or your choice just might not work out. Having three or more potential candidates increases your odds of finding the perfect, permanent fit.
Plan for the Best While Preparing for the Worst
When it comes to your business, you have every reason to be optimistic. You’ve poured countless time and energy into the success of your idea. A successions plan isn’t a doomsday premonition. It ensures your business a seamless transition when transferring business ownership, no matter what the circumstances. An attorney will help you regularly review your plan and revise it based upon changes to your business. Contact McCloskey today, for a consultation!