Why it is important to starting thinking about succession planning for your business
While it may be hard to fathom a time when your business won’t be part of your life, deciding how to leave your business is an important part of being a business owner. But which process is right for your business and your family?
Have you developed your exit strategy?
When it comes to succession planning it’s best to start strategizing early on. Even if your departure from your business is years down the road, ask yourself the following questions: What am I going to do when I leave my business? How much money do I need to retire? How will my exit impact my family? Will the business survive without me?
Don’t leave your exit strategy up to chance.
What are the options when planning an exit strategy?
- Liquidation If you’re looking to get out quickly and easily, liquidation is easy to implement and typically produces the most cash. Liquidation brings the lowest return on investment and creditors to have first claim on funds generated by the sale.
However, a business is much more than the sum of its parts. Leaving behind a legacy of goodwill can be much more valuable than buildings and inventory. Liquidation means losing those intangible assets.
- Keep it in the Family Another popular option for departing your business is handing it over to a family member. Of course this means you have a family member who wants the business and has the skills necessary to effectively run the business.
This type of transaction means the business will become part of your estate or business transfer, thus you will not get a “big check” when you leave the company. As long as you have a trusted heir and aren’t relying on proceeds from the company to fund your retirement, keeping the business in the family is an excellent option. - Sell to a Third Party If you’re considering selling your business consider the value of your business. Often times we discover our business is worth less than we might have originally thought. Planning your exit early can give you time to add value to your business.
- Employee Stock Option Plan Employee stock option plans (or ESOP) won’t work for every business. ESOP can be financially risky, as you might have to accept a promissory note as part of the purchase price. Or if the company doesn’t produce the necessary cash flow to pay off debts owed to you, the former owner, this could compromise your financial security.
If structured properly, ESOPs can be favorable tax-wise, though they may come under scrutiny from the IRS and DOL. Work with a Rea & Associate CEPA (Certified Exit Planning Advisor) to eliminate ESOP challenges. And listen to this episode of unsuitable on Rea Radio to learn more about ESOPs.
Succession planning can be unpleasant, but making a plan early and with the help of trusted advisors at Rea & Associates you can find an exit strategy that will allow you to reap the rewards of the business you built.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)