By: Gregory Aler
From one business owner to another, we get it. You put your blood, sweat and tears into your company over a lifetime. It’s your legacy. And the thought of walking away never crosses your mind while you have your nose to the grindstone. For many business owners, this oversight can cause a sad end to your company’s story.
The two big succession planning scenarios that should be on all business owner’s radar are the (i) Unexpected Exit Strategy (i.e. the big dirt nap) and (ii) Retirement Exit Strategy.
First, let’s discuss the Premature Exit Strategy. One of the most common planning tools to plan against this risk is the use of a Buy/Sell Agreement. This agreement lays out the owners, value of the company and how much each owner (or owner’s estate) should be paid if something were to happen to an owner. In addition, these agreements are typically backed with term life insurance on each owner/key employee’s life. This will ensure the deceased owner’s estate/beneficiaries receives fair compensation for his/her interests while not forcing the other owners to come out-of-pocket for this unexpected buy-out cost. Another benefit of this planning process is that the owners have to sit down, calculate, and eventually agree on the value. This is important because most business owners have no idea what their company is worth. Owner’s use a variety of valuation methods that range from as simple as a factor times annual gross receipts or enlist the services of a third party valuation expert. At the end of the day, this process helps put a number to the Buy/Sell Agreement and a starting point for other business exit strategy discussions in the future.
Next, we have the Retirement Exit Strategy, or lack thereof. Unfortunately, this is where most business owners and entrepreneurs fall short. This requires these self-starting, right-brain, micro-managing, do-it-yourself, business owners; to realize that they aren’t going to be the boss forever. And while most, I hope, business owners have a Buy/Sell Agreement (which will most likely never be utilized). Each and every business owner will eventually have to accept the reality that one day they are going to step away from their company. Formulating a tentative game plan early in the process is imperative for not only a successful transition to retirement but will ensure you can receive the maximum value for your company in the most tax efficient manner. There are endless tax traps business owners fall into when selling their interests that could’ve been easily avoided with some proactive measures. So, whether it be grooming a successor to buy out the existing owner or striking a merger deal with a competitor, having these conversations earlier and often will pay HUGE dividends when the time comes to step away.
The reoccurring culprits for business succession planning procrastination are usually linked to a professional service industry: Accountants, Financial Planners, Insurance Agents and surprisingly, Attorneys too. Putting off this planning can result in limited options when it comes time to pull the eject lever. This loss of leverage, can result in pennies on the dollar when cashing out.
AlerStallings’ team encourages all business owners to sit down with an attorney and CPA and talk about their future and goals. Remember, just having a game plan is half the battle and puts you ahead of the curve. Don’t forget that pushing this planning to the back burner can cause huge tax liabilities coupled with discounted valuations for your company. If you have questions regarding business succession planning, valuations, Buy/Sell Agreements and would like to further discuss your business and goals, please contact Greg Aler at AlerStallings Law Firm, located in Dublin, Ohio – 614 798 9800.