Small businesses that are successful quickly reach the point where it is wise to begin considering succession planning. A succession plan involves preparing for others to accept leadership roles, even ownership, when the current owner starts to step away from the business operations, is ready to retire or even if the owner were to pass away. Just as you may update your estate throughout your life to adapt it to major changes, so too should you make and update your businesses succession plan. There are many different approaches you can take to succession planning, all of which will depend on the type of business and your personal situation.
Family Businesses
Your kids, for example, may be interested in taking a leadership role in the family business, though this works out far less than many people believe. Approximately 30% of family businesses remain in the family in the second generation and only 12% into the third generation, according to research conducted by the Family Firm Institute. When it works, however, it can be a great way for the parents to slowly step aside and transfer what they love to those they love, i.e. their children.
Even though this may happen within a family, it is important that it be clearly and professionally documented. Ownership of the business should be formally transferred as well as decision-making control, even if slowly and over time. The business should allow an attorney to help them document the transition plan and help with each step to make sure everything is legal and preserve the businesses and owners assets against taxes.
Promote from Within
Another option for business owners includes working with a junior leader in your business to eventually grow into ownership or even to orchestrate a management buy you out. This often occurs when there are no children or those children have no interest in the businesses, but there is a junior leader working for the business with a clear goal of ownership. These transfers can happen smoothly as the elder statespersons place more and more responsibility in the hands of the younger. Again, it is wise to document changes in ownership and control every step of the way, especially in cases where outside purchase capital or owner-financing is involved. You can mix an employee stock ownership plan (ESOP) into the equation too. There are many tax benefits associated with an ESOP for the owner to consider and it is an excellent way to transfer a business to the current team of employees.
Selling Your Business to Outside Parties
Buyers considering purchasing a business are most interested in the businesses earnings of the business (i.e. cash flow), its balance sheet and the condition of its assets. Often, these buyers go through a third party (i.e. investment banker or business brokerage service) that helps them assess the business and its assets. A manufacturing business, where the machines are at the end of their working life, for example, will have to discount its value accordingly. Both sides of this transaction will engage attorneys to make sure the transfer of property and assets occurs correctly.
One aspect of the purchase that is often discussed and negotiated is the involvement of the previous owners during the transition and beyond. This ranges from no involvement to the previous owner remaining on the board of the company and offering advice. In some cases, the previous owner holds a more active role on an on-going basis. However, even while remaining involved, a sale often opens up owners to have the time to take care of themselves or enjoy a quasi-retirement.
Having a succession plan also gives customers and clients, as well as employees, a sense of security that business will continue even at the event of the owner’s illness or death. Virtus Law worked on approximately 38 acquisition related transactions and 27 acquisitions in 2016. If you would like help exploring your options or making sure your plan is well-documented, call the team at Virtus Law Firm at 612.888.1000 or send us an email at info@virtuslaw.com. With experience handling family businesses as well as sales, we can help you make the right choice for your situation.