Leaving a business or professional partnership presents you with many difficult decisions, ranging from determining who will take your place to how you will be compensated when assets transfer.
Ted Welch, a vice president at Peachtree Planning Corporation and founder and owner of Strategic Wealth Group LLC, says developing a succession plan for business continuity can provide solutions.
“A properly developed succession plan helps preserve the value of your business for your heirs,” Welch says. “You work hard in your business with the idea it will grow and have greater value, but if you are no longer there, it could lose value quickly.”
Smart Business spoke with Welch about how to plan your exit.
What are the major succession planning issues executives need to consider?
The most important issues center around continuity and valuation. Who will take over and how does the new owner retain your current employees? How do you value the business properly for sale and how does the new owner maintain that value and continue to grow it? In many small businesses, the owner is the brain trust behind everything; you may have some good employees, but they might not be as motivated as you or they might not be able to close the deal like you. How are they going to be able to continue to grow the business if you’re not there?
How can you keep the employees you may want to take leadership roles?
Develop a retention program, such as an executive bonus program or key employee insurance policies. You could consider some type of deferred compensation plan. Develop company-sponsored plans that benefit the employee and contractually require the employee to stay with the company for X number of years in order to receive the full value of the benefit. As the owner, you are getting value because this person is going to be loyal and stay committed to your business, instead of getting a better deal from your competitor who may be offering a buyout with a higher salary.
How can you sustain business continuity during the succession process?
I recommend you first develop a comprehensive organizational chart. Identify key people and help them understand their roles and responsibilities. Each employee has unique abilities. Recognizing those abilities and placing the emphasis in their area of strength will help gain efficiency.
If you communicate openly and people understand who is responsible for what and to whom they answer, a major change such as a sale or change in management will not be so disrupting. Many small business organizations develop in an ad hoc fashion over a number of years leaving employees not knowing how to react if the owner is suddenly no longer there. A change in ownership may lead to an unnecessary loss of key people.
How do you value the business for structuring a buyout?
The best advice is to choose the method for valuation in advance. There are two popular methods used to value either the worth of the business or the value of the business assets. You must decide what the best system is to value your business and determine the amount of the buyout and any possible future compensation.
Different types of businesses require different approaches to valuation. If you have a manufacturing plant you might look at some multiple of sales combined with the value of your plant and equipment. If you are a doctor or dentist you usually arrive at a number based on the revenue you have from your patients. If I have been a dentist for 25 years and you are the new dentist who is taking over and I have never introduced you to my patients, there is no guarantee those patients will stay with you. How do you decide the proper amount to pay for that stream of income? It can be very complicated, and you need to find someone who understands your industry to help you find the best valuation structure for your business.
Who needs to be involved in the valuation discussion?
Mainly, the current ownership and all the parties involved in the sale or transfer. Ideally, the key employees, your CPA, attorney and financial adviser all should be a part of the discussion. If I have a partner who is 10 years younger than I am, I’m going to retire before he does. So we need to agree upon what the buyout structure is going to look like. He needs to be involved.
Your financial adviser is especially important, because he is the one who can help you put these ideas together, implement the strategies and help you find the proper funding vehicles.
Are there any legal pitfalls to be aware of?
There are many legal and financial pitfalls and usually a multitude of questions concerning the taxation of the sales proceeds. An owner’s team of advisers needs to make sure the legal documents and the funding vehicles are coordinated with the plans. So many times people have great legal documents, but they don’t own the right funding vehicle. It is a great document, but it is never going to produce the desired outcome because they did not own their products correctly.
Joe Robbie, the former owner of the Miami Dolphins, probably had great documents for his estate and trust plans, but they still had to take his name off the stadium he owned because he did not have the proper vehicles in place to give his heirs the ability to receive their inheritance and minimize estate taxes.
Ted Welch is a vice president at Peachtree Planning Corporation and founder and owner of Strategic Wealth Group LLC. You may contact him at (229) 244-0046 or email@example.com.