I AM PLANNING MY BUSINESS SUCCESSION
Whether you are handing off your business to the next generation of your family, or are allowing trusted employees and partners to take over your ownership, business succession is one of the riskiest decisions you will ever have to make. The succession planning process is often complex, with wealth planning, tax, relationship, legacy and management ramifications, often with competing economic interests.
Even Fortune 500 companies, with all of their resources, struggle to get succession right. So if you are having difficulty planning succession for your own business, you’re in great company.
You can minimize the risk of the succession plan by carefully considering the following:
Learn the value of your business. Knowing the value of your business sets the stage for your follow-on decisions. Specifically, knowing the value of your business will tell you a) whether you’re financially better off transferring to a successor or a third-party buyer, b) your tax liability if you gift your business or the price that must be paid by your successor(s) to avoid a tax liability, and c) if your successors can afford to buy your business. Thus, knowing the value of your business will help you understand what succession choices are realistically available to you so you can spend your time and energy on those. If your business is not ready to support your succession yet, the valuation will enable you to prepare it for succession down the road.
Determine if you can afford to leave the business and under what terms. Work with your financial advisor to determine whether your long-term financial plans can be achieved if you exit the business. Your financial situation may dictate whether you gift or sell your interest to your successor(s). Your financial situation may also determine whether you need to earn as ongoing income from the business after your departure and if it should (or can) pay for things like post-retirement healthcare, disability care, and life insurance. If you need to work in the business a bit longer, the time to find that out is before you hand the business off.
Set your most important objective. Succession goals can be straightforwardly financial, such as, “I want as much money as possible.” or somewhat more personal, such as ensuring continuity for your employees and clients, continuing to impact the community that has supported them, pursuing social goals, providing a wealth engine for future generations, or others. While your business can achieve multiple objectives, you must set one priority above all others, or none of the objectives will be achieved well.
Decide your preferred succession mechanism. Succession usually happens in one of three ways. Either you transfer or gift the interest to one or more recipients (perhaps through a trust), you sell the interest to the successor(s), or you withdraw from the business operations but keep the ownership to yourself until a later time.
Succession planning can be very stressful, involving tremendous risk and uncertainty, but it doesn’t have to be that way. The right advisor will add clarity, help you get buy-in from your family members and employees, ensure compliance with tax requirements, and position you to achieve your objectives. Your risks are manageable. If you have a question about succession planning and the price your business should attract in a sale, contact us at High Score Strategies to set up a consultation.
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