If you’ve spent years nurturing your business into a successful enterprise, the last thing you may want to think about is leaving it behind.
But in one way or another, that transition will come, and the only way to make sure it happens the way you prefer is to begin planning for it far ahead. Not only are private businesses often the largest assets and primary wealth generators for owners and their families, they also tie up the hopes and dreams of numerous stakeholders. Each alternative: sale to a third party, handing off to the next generation, or going public, has enormous consequences, financial and otherwise.
“Entrepreneurs are do-it-yourselfers; that’s really their style,” says A.J. Steger, a partner in the business consulting service area of accounting firm EKS&H. But going it alone in transition planning can deprive you of valuable insight and dispassionate perspective. “Generally we like to be talking to business owners before they’re interested in talking,” he admits. “Most people have a hard time addressing something like this. And when you begin the conversation, it’s often a matter of opening their eyes and getting them to consider all the options available. The last thing you want out of this process is regret.”
Steger and others suggest that business owners consider the following factors when planning a transition:
Finances
Certainly, the financial aspects are crucial, but they’re just one of many considerations. Planning ahead will give you an opportunity to build your company’s value in advance of a sale, which is a different strategy than growing sales. While transition planning is not the same as retirement planning, they often go hand-in-hand, and Steger recommends involving a retirement planner in the conversation.
Timing
“People often set their timing based on when they can get enough money out to live,” Steger says. “I try to reverse that, to consider timing irrespective of money. I want your timing to be based on enjoying your life, staying engaged, and finding opportunities you’re excited about.”
Involvement
Deciding how gradually you want to transition out of day-to-day management is a separate decision from timing. Do you want to leave as soon as possible, or ease yourself out gradually?
Legacy
Owners very frequently will put legacy ahead of money as long as the money is reasonable. They may not like the idea of leaving their employees in the hands of an acquiring company or having the name on the door change. But whether you keep a stake in the company or pass it along to your children has implications. “I get a lot of people at the beginning thinking or hoping that there’s a family transition, and then they realize during the process that that’s not as likely and or reasonable when they figure out what their goals are,” Steger says.
Risk
Business owners also must consider their risk tolerance and be prepared to adjust it from entrepreneurial mode to retirement mode. At the low end of the risk scale is selling for cash while maintaining a stake in the company, which means your investment is tied up in the fortunes of the business. Similarly, if you hold a note from an employee leveraged buyout (LBO), Steger says, “you have to sit and wait, hoping they perform well enough to pay it off. You can’t walk away from the business in that situation.”
Deciding how you’ll transition out of your business shouldn’t be left to the last minute. You need time—at least five years or more—to maximize the value of your company for a sale or give it the financial and managerial underpinnings to ensure its success if you leave it in the hands of your children or employees. And there’s another reason for giving yourself ample time: You might change your mind. “Often, parents are crossing their fingers that their children will carry on the business successfully,” Steger says. “But maybe what’s more important is that mom and dad are retired and have dollars to pass on to their children later.” His best advice? “You have to take care of yourself first.”
