Planning for Business Succession and Exit
Congratulations on successfully building and growing your business. The odds were against you surviving more than 5 years[1], but you beat the odds. Have your thoughts now turned to retirement? Or cashing out? Planning for business succession and exit successfully will require as much planning as growing it.
Business Succession: Properly Planned Exit
A properly planned exit strategy ensures that the benefits of your hard work and your vision for that the business continues to thrive. It is a natural succession and necessary step toward achieving your goals and protecting your assets. Additionally, it helps ensure business continuity. The sooner you start to plan, the more options and flexibility you will have.
Business Succession: Start by Asking These Questions
Exiting your business starts with answering questions:
- Do your children want to inherit your business?
- What if only some of your children want to inherit your business?
- Will you have junior managers or employees who may want to purchase your business?
- Are you comfortable that these people are capable of running the business, either now, or with a few years of training?
- Does a competitor want to acquire your business?
- Or do you need to search for someone willing and able to acquire and pay for your business?
Business Succession: Value of Your Business
Are you being realistic about what someone would be willing to pay for your business?
Business owners frequently have exaggerated ideas about the value of their business to a third party. Professionals like accountants, attorneys, and business valuators should be consulted early in the process. There are sometimes ways to enhance value substantially in a few short years; another reason to start planning early.
Business Succession: Do You Own it
Furthermore, what are the assets that you actually own?
- Do you own the business real estate or are you renting?
- Is your lease long-term or short-term?
- Will you lease essential equipment?
- Are you a licensee of essential software or patented inventions?
- Could there be nontransferable licenses or permits such as liquor licenses?
Be careful not to sell things, or promise to sell things, that you don’t really own.
Business Succession: Tax Consequences
Taxation is an important consideration. Many deals are driven by the tax consequences of the various options. Your tax professional will need time to analyze the options. More time may be needed to implement changes that can result in you keeping more of the purchase price.
Business Succession: Transfer Business
Transferring the business to your heirs typically involves gifting rather than selling. This requires consideration of federal and state estate and gift taxes. Depending on the value of the business, and the timing and value of gifts, there may be estate and gift tax consequences to your gifting. Once again, advanced planning is necessary can minimize taxation. If you’ve never operated through a corporation or limited liability company, you may need to form one and put the business into it. Thus allowing you to make gifts of fractions of equity in the company so as to reduce taxation and maintain management.
Business Successon: Insurance
Sometimes these gifts are to be spread out over several years; this again points to the need for advance planning. What do you do if not all your children want to participate in the business? How do you give them equal value? Insurance can be a part of the answer here, and there are other methods as well.
Business Succession: Management Succession Plan
Unfortunately, not all exits are planned. Death and disability can cause unanticipated changes in management. Insurance policies are part of the strategy for managing such events.
However, they alone are not sufficient. A written management succession plan is strongly recommended so that at a time of trauma and crisis, people can follow a well-considered roadmap for the future. This plan may be incorporated into a shareholder agreement or operating agreement, or it may be a separate document.
Finally, recognize that every business, and every family, is different. There is no ‘one size fits all’ plan for succession or exit. The one piece of universal advice is to start early when planning your strategy for moving on. If you want to discuss developing a succession plan for your small, medium or large business, we can help.
[1] About half of all establishments survive five years or longer. About one-third of establishments survive 10 years or longer. www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf
Gary Schuster is a Partner with the firm and practices Arts & Entertainment and Business Law. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.
