(Part 1 of 6)
One of the unfortunate consequences of the Great Recession is that so many business owners were focused on the immediate survival of their company, they put off long-term planning for the future – including an exit plan for when they want to retire or sell their business.
This month we are beginning a new six-part series that will walk you through the succession process, starting with an overview of how to begin the discussion. Subsequent articles will focus on specific topics like positioning the company for a sale, getting a new management team in place, finding the right advisors, and so on.
In our collective years of experience, the team at Sponsel CPA Group has often encountered owners of very successful ventures who haven’t adequately saved for retirement on a personal basis. Most of their personal wealth is tied up in the business, and they thought that was enough to fund their golden years.
One of the first things you must do is define financial freedom for yourself. What sort of lifestyle do you expect to maintain in retirement? How much money will you need? How can you best extract that value from the business and turn it into personal income-producing assets during your retirement years?
It’s vital to keep in mind that succession planning isn’t an overnight process. We advise most clients to start thinking about it five to 10 years in advance. If you want to retire young enough to enjoy the fruits of your labors, that can mean starting the planning process while you’re still in your prime. But it is never too late, if your timeline is shorter.
This can be a challenge in of itself. If you are a 55-year-old Baby Boomer who feels like you’re at the top of your game, it’s natural to resist contemplating the finale. So ask yourself: are you really ready to give up control?
If yours is a family business with multiple generations of ownership, there can be an additional sense of responsibility to those who came before and after. In this case, it’s vital to communicate with the next generation as early as possible to explore if they’re interested in acquiring the business.
Too often, this sort of serious discussion never takes place, which can result in all sorts of undesirable confusion and enmity. The legacy of the business operations may not survive.
For example, we once advised a client with two children: a son deeply involved in the day-to-day running of the business, and a daughter who was completely uninvolved and disinterested. The owner’s initial plan was to transfer ownership of the company to the son, but give the real estate to the daughter. The son objected, arguing that he would be doing all the work (50-70 hours a week) while his sister would sit back and collect rent checks, with no effort!
In another scenario, a father (a second generation owner) sold the company to a third party, only to learn after the letter of intent was signed that his daughter had hoped to one day take over the reins, even though she was not working for the business at the time of the sale. She was never asked by her father if she had an interest in the business.
These examples go to show that it is not always clear-cut in terms of what the family will think is fair. If that next generation is married, this adds another component as their spouse may want to have a say and/or participate in the business.
Finally, as you begin the discussion for succession, consider the potential value of the company and what terms of the transaction will be acceptable to you.
In our experience, a very small percentage of business owners walk away with a single check for a lump sum. In most cases, it’s actually less than 5 percent of the purchase price. So start thinking about the payment terms and financial structure you will need in retirement, or for your next venture.
In next month’s installment, we’ll talk about selecting the right leadership team to ensure a smooth transition.
If you have any questions about the succession planning process, please contact Amber Hoover at (317) 613-7844 or [email protected].