As a business owner, you’re likely focused on running the business. Planning for succession is far from your mind. A failure to focus on the future, however, can be disastrous when it comes time to relinquish control. There is no “one-size fits all” approach. Here is an overview of options for transitioning your business.
Ways to Transition Your Business
(1) Outright Sale. One way to transition your business is an outright sale of your company. An outright sale can take on several forms.
(a) Selling to Individual. For some businesses, it is ideal for the company to be led by someone who is both the owner and operator. If so, you want to consider a sale of your business to an individual.
(b) Selling to Private Equity. If your company meets certain investment criteria, you may sell your company to a private equity firm. In today’s marketplace, firms of various sizes invest in small and sometimes even unprofitable companies with the hopes of finding a diamond in the rough.
(2) Family Transitions. Another option is to transition ownership to family members. This transfer can be accomplished by either selling or gifting shares. Note, however, if you wait too long to make a decision and no estate-planning documents are in place, your business will be considered part of your estate and subject to probate, as well as tax consequences. Even worse, you could spark decades of family feuds and permanent rifts.
(3) Leaving Business to Co-Owner. If your business has one or more co-owners, you might consider establishing a buy-sell agreement. These agreements transfer ownership interest to the surviving owner(s) at an owner’s death. This arrangement ensures that beneficiaries of the deceased owner (such as their spouse or children) don’t unintentionally become owners. Life insurance and irrevocable life insurance trusts are often utilized in conjunction with buy-sell agreements to provide necessary liquidity.
(4) Dissolution of Business. The last option is to terminate the business or “wind it down.” Liquidation of assets takes time, requires significant paperwork, and may result in forced transactions with undesirable prices. If this is the correct path, be sure it’s done sooner rather than later.
Mistakes to Avoid
Here are three big mistakes you want to make sure to avoid when deciding your succession plan.
(1) Delay. The first business succession planning mistake is delay. Don’t be the business owner who waits until the last minute to create their plan. For the best chance of success, create a succession plan early, then lay the groundwork to implement that plan throughout several years.
(2) Equity not Equality. If you are a business owner with several children, there are plenty of ways to transfer your business to the logical successor while providing equal distributions of your estate to other children. For example, consider a business owner with three children. Two of the children studied the family business, but the third pursued unrelated interests. It wouldn’t make sense to divide the business into three equal shares between the children. An alternative route would be to determine the value of the business, then obtain a life insurance policy that would provide a similar payout to the other child.
(3) Successor Training. Think back to when you started your business. Chances are, it took you some time to learn the ropes. Knowing this, it would seem illogical to thrust your successor into the business without proper training. Even if they have been part of the business since its inception, working for a business is often far different than running it. As such, allow enough time to properly train your successor so that he or she can cultivate a mastery of the business tasks and relationship.
Determining the right type of transition that is best for you and your organization requires introspection and assessment of your business operations. Contact Peter Sayegh to make sure you can create a viable succession plan, provide for your financial independence when you retire, and position the business for continued success and growth.