Business Succession Planning
Business succession planning is the process of providing for the passage of ownership and control of your business to others when you decide to retire, or if you should die or become incapacitated. Planning for the succession of your business is an important part of being an owner, but one often overlooked by entrepreneurs. Here are some of the most common options and considerations. Keep in mind that they often overlap and the best answer is usually some combination of the options available to you.
1. Sell Your Business to Someone Else.
If your greatest concern is to be sure you get paid for the value of your business – in other words, you want the cash and may the chips fall where they may – then this is usually the safest option. If you find a willing third party buyer, you may be able to negotiate the deal to require the buyer to obtain their own financing and pay you up front.
The downside is that settling upon an agreed value for your business can be a time consuming and expensive process, involving accountants, tax experts, lawyers, realtors and potentially other experts.
If this is an option you think you would pursue, start documenting value now! Keep meticulous business and accounting records. Track repeat customers, referrals, customer comments and other indications of your business’ reputation and good will in the community. Commit to efforts to retain long term employees. All of these factors will make your business more attractive to potential buyers and favorably impact its perceived value.
That said, keep in mind that it can be very difficult to find a good buyer, willing to pay an acceptable price and on terms that you can live with. Valuation is often the most difficult aspect of a business sale.
2. Leave the Business to Your Kids.
If you are planning to go this route, it is important to bring your kids in early and let them learn the business from the ground up. Start them out in an entry level position. Let them learn several of the jobs needed to run your company, one job at a time. Let the other employees get to know your kids as trustworthy, hard workers who are committed to the company. Don’t just show up one day with your child and announce that he or she is suddenly running the company.
Consider the wants and needs of your children as well. Much as you might not like hearing it, your kids may not want your business. Don’t force it upon them if they aren’t interested. Most small businesses fail by the second or third generation. Leaving the business to kids who don’t want it is a sure way for your business to join that statistic.
Another big mistake is to divide the business equally between several of your kids, even though only some of them are actively involved in the business. Fair is not always equal. Give the business to the kids that are active in the business and leave some other asset of equal value to the disinterested other kids.
3. Promote from Within and Transfer the Business to Employees.
Think about your existing employees. Are there any whose loyalty and commitment to the business stand out? Any who seem able to handle more responsibility. Any with the skill and judgment to carry on when you’re no longer involved?
Promoting from within and mentoring a replacement is an attractive option, especially if you have built the business yourself from the ground up and you don’t want to see it end or go to “just anyone.” Mentoring gives you the opportunity to pass along your know-how and your work ethic to a willing audience, provides for greater continuity of management, and gets you a successor as personally interested in the continued success of your business as you are.
The trick with this option is that you may have to finance some of the “buy out” yourself. New owners, especially younger ones without a track record of proprietorship, are often unable to obtain full financing to purchase a business. A combination of third party financing and your own “pay over time” arrangement will likely be necessary. This may include an arrangement for you to have some degree of continued participation in the business as a “consultant” to help with transition, or a profit sharing arrangement in exchange for more favorable terms on the buy out.
Of course, this option is not without risk. A sale to a third party is less likely to require that you self-finance. Sponsoring the buyout of an employee purchase means that you may not get paid if they run the business into the ground. Depending on your circumstances, however, this risk can often be somewhat minimized by slowing the transition process and allowing you to retain more control until the successor has a more proven track record.
Another alternative is to use an Employee Stock Ownership Plan (ESOP), which allows the employees to earn ownership interests in the company.
4. Close the Business.
For many business owners, closing the business is the least desirable option. They have put their heart and soul into building that business, with much blood, sweat and tears. To watch it just close up is, for them, like watching the death of their dreams. Other owners find closing up shop to be a liberating experience with the least amount of hassle. The key to making this a good experience is for closure to be an option not something forced upon you because you have no choice.
Putting in place the strategies described above is the way to keep control of the decision. Failure to plan is planning to fail. If you have no plan in place, it is far more likely that you will have no choice but to close up and move on. If you are one of those who prefers that option, you’re not done yet. When you close, be sure you pay attention to closing formalities and that you provide for payment of the business debts – especially if you have personally guaranteed payment, which is very common for business loans and lines of credit.
5. Put a Business Buy Sell Agreement in Place.
A business buy sell agreement is an agreement between the owners of a company (owners, shareholders, members, partners, etc.) that settles what will happen if certain events occur. For example, a buy sell agreement can decide when one owner gets to buy out another, or when the company has the right to reacquire shares. It spells out how the company will be valued, what happens if someone gets divorced, and what to do when someone dies. Getting this settled up front can save a lot of time, hassle and expense when events later happen.
6. Get Key Man Life Insurance.
“Key man” life insurance is a life insurance policy, usually owned by the company, that insures the life of any key executive — someone whose death would gravely affect the business. The insurance provides liquidity to fund a stock repurchase, hire a qualified replacement, pay taxes, and other needs.
No matter what option you find appealing, the key is to get a plan in place and to do it as soon as possible. Remember: failing to plan is planning to fail!