You’ve done it! You’ve launched a successful business that helps people while returning a profit. Congratulations! But what happens to your venture if you no longer want to run your company or something happens to you? If you’re not sure, you need a business back-up plan—or what lawyers and financial types like to call a business succession plan.
A business succession plan involves meeting with your legal and financial team to make some logistical and financial decisions about who will take over your company if you retire, are no longer able to run the business due to disability or incapacity, or in the event of your death. The first step in crafting this plan is to identify the ideal person (successor) to take over the business, then determine the best arrangement for transferring or selling the business to that person. This usually involves what is called a “buy-sell agreement,” secured with a life insurance policy or loan, which authorizes an owner to transfer or sell his or her interest in the company to 1 of 5 types of “people”:
(1) a co-owner,
(2) an heir/family member,
(3) a key employee,
(4) an outside party, or
(5) the company itself.
You might be thinking, “I am not even remotely close to retirement and I’m never selling my business to anyone. I just launched it; it’s my baby! Why do I need to think about succession planning now?”
Great question! While most people think about succession planning only when they’re ready to think about giving up their entrepreneurial pursuit for nothing but tennis, golf, and mid-day martinis, business succession plans can play an important role in early in your company’s life span as well. And executing a succession plan can sometimes take years, especially in the case of a family-owned business.
A succession plan clearly states who can or will take over the company, which minimizes the potential for disputes. If the plan involves a sale of ownership interests or assets, the plan will specify the sale price, terms, and any special conditions. This type of planning relieves a huge burden for the remaining owners and the departing owner’s family.
A thoughtful, well-crafted succession plan should benefit everyone, including the departing owner, his or her family, the company and the successor. For entrepreneurs that want to sell their company, it is best to plan the transition strategy well in advance to avoid potential mistakes or profit losses that can occur if the sale is an afterthought or a rush job. Developing a business succession plan can ensure that you get full value for the sale of your company or that you can pass it to your family or another person in alignment with your vision.
Many entrepreneurs dream of selling their company to an external buyer for big bucks as an exit strategy. They think this will be easy, but it is not. Most entrepreneurs struggle to find an outsider who wants to buy their business. In these instances, an internal successor (typically a key employee, co-owner, or family member) may be a better bet for ensuring your corporate legacy lives on. The process of succession planning gives you an honest evaluation of your options so you can proceed with eyes wide open.
It takes time to smoothly transition your company to a key employee, manager, or family member. On average, a departing owner should allow about 5 years to get his or her successor ready to take over the business. The new owner will need to learn how your company works, gain the expertise that only you have, and build relationships with clients, vendors, and employees.
To optimize the market value of your business, you need to ensure that it has solid growth prospects, a history of profitability and a bulletproof balance sheet. This requires time . . . and possibly your own investment in the company, assurance that there are no personal expenses on your books, and consultation with an accountant and attorney on structuring the sale to minimize your tax liability.
Perhaps most importantly, you need to prepare your business to run without you. For example, you should document and protect your company’s intellectual property—including its policies, procedures, and business processes—so that anyone new can easily take over operations. Be sure to train your employees to consistently execute your policies, procedures, and processes, as documented to ensure this intellectual property, adds maximum value to the sale price
If you want to pass along a legacy while getting top dollar for your company, it pays to speak (early and often) with bankers about financing for the transition. This is particularly true if your plan involves an internal successor who does not have much investment capital. In such cases, your transition plan may require a mixed bag of financing options, including but not limited to seller financing, vendor financing, mezzanine financing or a term loan.
Even if you never plan to sell your business or retire, having a succession plan in place is a beneficial back-up measure to use “just-in-case of emergency.” If you fail to think about succession planning until a health issue arises and you have to sell, you won’t be able to optimize your business’ value and you’ll likely leave your family with a tax bill far larger than you or they expect. Moreover, your company will have a hard time operating normally under such circumstances.
If you’re ready to take the plunge and start succession planning, a knowledgeable business lawyer can help you optimize and streamline the process. The experienced team at Thrive Law are ready to help. Give us a call today to discuss your company’s plans for the future: 727-300-1990.