Fundamentals Of Business Succession Planning
Inevitably, every business will end. Successful businesses plan for the end, and, as a result, maximize the value of their efforts. A proper advance plan can help maximize value when the time comes. Just as every business is different, a plan for succession varies for every business. There are a few fundamentals for an ‘advance plan’ for closely held businesses that should be considered.
First, a “don’t”: Don’t plan by crisis. I have experienced far too many closely held businesses that were forced to sell for too low a price, or simply close their doors, because they never faced into the reality that their business would end one day. Planning for the death, sickness, or incapacity of the primary owner is a must. Plan in advance.
Second, decide what the owner and the family want to do with the business. Do they want to retain the business in the family? Will the business be sold to a competitor? Will the business be sold to an investor? Will the business never be sold? Thinking through these scenarios help the owners organize themselves and their business to attract the most likely successor.
Many closely held business owners look to pass on ownership within the family. Unfortunately, in most cases, this may not be the best option. In fact, 70% of family businesses fail by the third generation. However, in the cases where family succession is the best option, a proper advance plan contains two main steps to facilitate maximum estate planning effectiveness: provide for the owner to have adequate retirement income; and provide for all family to be treated equitably, even if not equally.
Often the best option is to sell the business. Maximizing the value of the business is paramount when selecting this option. I advise two main steps to maximize business value prior to the sale. One, get the business in a condition to sell at the maximum price. Two, sell at the optimal time. Depending on interest rates, inflation, and economic outlook, the optimal date of sale varies. It takes many years and tremendous organization to maximize the value of a business for sale.
I have the privilege of representing many family businesses, and the transfer of a business from one owner to the next is a severe test. While the comments above are only the beginning, take the time to think through your plan. If you do not have a plan, we would be pleased to help you begin the process.