Entrepreneurs spend most of their time,
energy and sometimes life savings
developing a business. As these people work and plan to make their business
successful, they rarely consider what they
will do with the business when they want
to retire, when they die or how estate taxes
attributable to the business will be paid.
Business succession planning is necessary
to developing a business and must be outlined as soon as a business is developed.
To transfer a business successfully from
one owner to the next, succession planning
should commence as early as possible. “I
have never seen a business fail due to payment of estate taxes when there was proper succession planning,” says Richard
Kissel II, a director with Sommer Barnard
and chair of the Estate and Business
Succession Planning Group.
Smart Business spoke with Kissel about
the planning options business owners have
and what factors should be considered
when developing a succession plan.
What options do business owners have when
planning the future sale of their business?
Most business owners work very hard to
build a successful business. Therefore, the
decision to give up control of their investment can be very difficult and require
much planning and research. Typically,
there are three primary options for the
future of a business. Owners can begin to
structure a plan to pass control to their
children, pass control to an inside management group or they can sell the business to
a third party with whom they are not affiliated.
In most cases, it is human nature for business owners to want to pass their investment to their children. This option depends
on whether business owners have children
who are willing and capable to run the
business. This option is not always feasible, so other options are often utilized.
What factors must business owners consider
when selecting a future owner?
Business owners need to take a realistic
look at the situation as a whole. Pride and emotion are involved with companies that
individuals create. The key is to take an
outside look to see what decision is best
for the future of the company as well as the
owner’s personal future.
If children are involved in the business,
the owner must evaluate their managerial
skills and their capabilities to run the company in the future. If they are going to successfully operate the business, the children
must have knowledge of the industry and
must be able to keep developed relationships with customers and others for future
business.
Cash flow from the business must also be
evaluated. Business owners must know
how much cash flow is needed to support
them comfortably in retirement and to provide reasonable compensation for the new
owners.
A seller’s interest in the future success of
a business often depends on how the seller
is being paid. If they are selling to a third
party, they should try to obtain almost all
the purchase price upfront. In that case,
they can be less concerned with the future
success of the business. While the former
owner may be disappointed, they are not
affected financially and have less at stake if
the business should come to an end. On the other hand, if they sell to their children or
a management group with little money
paid upfront, the failure of the business
could have catastrophic effects on the seller’s personal future.
The owner should also determine how
much input, if any, he or she will have in
the business after the transfer. If a business
is being sold to a family member, the
amount of input the seller has following
the sale usually depends on the family
dynamic and the payment plan. If the seller
is being paid over a period of time, he or
she usually has some right to be involved in
the business after the sale. In other situations, there may be a need for the seller to
let the new leaders have complete control.
The decision should be made based on the
future of the business.
How can business owners design a financial
plan for the successful future of their business as well as personal needs?
The longer period you have to plan, the
better. The senior generation can make
gifts of stock or other interests of the business to children over a period of time. This
is less stock that children may have to buy
at the time of the transfer to them. The less
strain there is on cash flow because of the
sale, the greater the chance of a successful
transition.
If a third party is purchasing the company, the plan depends on the owner’s cash
needs for retirement and the business’s
ability to generate cash. If a business is
being sold to someone unrelated to the current owner, it can be crucial to obtain as
much upfront cash as possible.
Succession planning funds the senior
generation’s retirement, it creates wealth
for many generations of the family, and —
if done correctly — helps the business succeed for generations to come. It also preserves the business that the senior generation has spent much of their life developing.
RICHARD KISSEL II is a director with Sommer Barnard and
chair of the Estate and Business Succession Planning Group.
Reach him at [email protected] or (317) 713-3500.
