Your Business Succession Plan: Making the Transition

Strategies, structures and tactics to make your business succession plan a success.

Every business owner eventually starts to think about what their life will be like after they move on and what they want their business to be like after they leave. Their visions for each are deeply personal and as varied as the business owners themselves.

Whatever form it takes, this transition is inevitable and increasingly common as millions of baby boomers move into retirement. “We estimate that half of all small, privately held businesses out there today will have to be transitioned over the next 10 years,” says Mark Jacobs, Houston Market President and Commercial Banking Leader for Regions Bank.

Leaving a business you’ve nurtured for years and even decades can be a poignant and exhilarating experience. It’s a path to an exciting new chapter, but one that can also be daunting in its complexities. Those complexities often boil down to one question: How can you move on in a way that works for your family, your employees and your own dreams for the future?

Plan early, communicate thoroughly

Time is your best ally for an exit that’s as successful as your business has been. “You can’t start planning soon enough, because so much goes into this,” Jacobs says. “Will you sell the business to an outsider, or transition it to your kids? What will you need to take away from the business to maintain your lifestyle? These are questions you can’t answer in a day.”

Jacobs recommends that business owners “start having serious conversations with your children and your spouse 10 years before you leave the business, because you’ve got to work as a team.” Frank conversations can head off misunderstandings that could prove disastrous if left until the time you’re ready to leave.

For example, if you’re counting on your daughter to run the manufacturing business in a few years, you should sit down and make sure that her true passions align with that plan. It’s better to know now, Jacobs says, while there’s still time to groom a different successor, if need be. “In a family where some children work in the business while others don’t, you’ll need time to develop a plan that rewards them all fairly, and to clearly communicate your intentions,” says Judi Cunningham, a family enterprise consultant and visiting scholar at Kennesaw State University in Georgia.

Small-business owners who dream of passing their business down to the next generation face another dilemma, Jacobs says. On one hand, they shouldn’t minimize their own financial needs in retirement. But on the other hand, they should be careful not to remove too much cash and leave the business with insufficient liquidity.

“Just because EBITDA [earnings before interest, taxes, depreciation and amortization] was at a certain level last year, doesn’t mean it’s going to be the same going forward,” Jacobs says. And earnings often do dip as the children get their first taste of running the business alone.

“One way to ease the transition is to gift shares of stock in your company to your children, starting years in advance of the transition,” says Dennis Tygart, Wealth Strategist with Regions Private Wealth Management. “You can create shares that have nonvoting rights,” he adds. “The children can’t sell them to anybody, and they don’t get to make decisions over the business until you’re ready.”

Selling smart

If you plan to sell the company outright, your plans depend on two fundamental questions: What is your company actually worth? And who will want to buy it? “I’ve met business owners whose transition plans started and ended with: ‘I’m going to sell my business for millions of dollars,’ ” Cunningham says, recalling the owner of a successful seasonal business that was located in a remote area. “He’d spend six months there and six months back in the city. It was great for him and his family,” she says. “He was so sure others would feel the same way that he spent little time assessing his company’s market value or scouting prospective buyers.”

“His entire retirement plan was based on what he assumed would be the proceeds of a sale,” Cunningham adds. Yet the dual rural-urban existence had little appeal for most prospective buyers, forcing him to continue managing the business beyond his hoped-for retirement age.

To avoid unpleasant surprises, Jacobs suggests hiring a certified valuation analyst (CVA). While it costs more than “guesstimating,” a CVA will examine your business from its assets to its goodwill, separate emotions from hard truths and find the likely market value.

Life, legacy and lump sums

Whether you sell your company outright or opt to maintain a revenue stream from it during retirement, your plan needs to provide enough income to support your desired lifestyle and all that it includes, such as travel and philanthropy.

The problem for many owner-operators is often that they’ve never managed the large lump sum that can come with a sale. “For much of their lives, they haven’t been very liquid, because they’ve put all their money into the business,” Jacobs says. “It’s important to meet with your CPA well in advance of a transition to help you understand and minimize the tax liability you’re going to incur.”

How you structure the sale, the timing of the transaction and the type of company you’re selling will affect the taxes you’ll owe. With sufficient time to prepare, your tax specialist can help you find the most tax-efficient approach.

Business owners should also conduct a detailed analysis of their personal needs, Jacobs says. “What does my household budget look like when I leave this business, and how do I meet that?” With that analysis in place, your wealth strategist can help you determine the types of investments that will provide the income you need moving forward, without taking on too much risk.

When your employees are your business

Employees are essential components of any business owner’s success, and for many owner-operators, looking out for their well-being is one of the biggest priorities, and a challenge of any major transition.

Jacobs says that in some transitions that he’s advised, concern for employees influenced how the owner chose to sell the business. If a buyer is mainly interested in a company’s assets, or in gaining a competitive advantage, they would be more likely to break the company up, leaving the employees without jobs. Even in deals where such a suitor was offering top dollar, Jacobs has seen owners choose a buyer interested in keeping the business intact and its employees employed. “Depending on your situation,” he says. “You might be willing to take a discount because you know that your employees are going to be taken care of.”

While open communication with family is important, sharing the details of a transition with employees or customers while the planning is still in progress may be counterproductive, Jacobs warns. “Employees usually don’t like change. You’re going to hurt the business and you’re going to hurt them, because they don’t know what’s going to happen.”

Only when you have firm plans in place is it wise to offer some assurance about their jobs. Rewarding key employees with shares in the company can help ensure that they stay on to support the company moving forward, he says.

Adding it all up

With so many moving parts, it’s no wonder that transition experts recommend years of planning. That can seem like a tall order while you’re still fully engaged in running your company, but your Regions Relationship Manager can assemble a team of experts—including your attorney, tax specialist and others—to help ensure that the time and passion you invested in your business pays off in a future as bright as the past.

Speak to your Regions Relationship Manager about:

  • How to have productive business transition conversations with your family as potential successors
  • Steps you can take to prepare your company for a sale
  • Whether your retirement plan is adequately accounted for in your exit strategy

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