Planning how you exit your business is just as important as planning how you start it. When creating an exit strategy, a business owner should start at least two years before retirement, but the more time available to plan the best strategy, the better it will work out for all involved.
The first step is to create a team of experts that is well versed in business succession strategies, finance, estate planning, investment planning and tax laws.
The next step is to determine the company’s fair market value. The best way to do this is usually to hire a valuation expert to analyze the business and assess the value of the business and its assets, including inventory, equipment, accounts receivables and good will. The fair market value of the business is often a multiple of the sales of the business over the past few years.
“With a good team of advisers and a solid valuation in place, the owner can then begin to strategize the best path to move toward his or her exit,” says Kim Milder, a vice president and senior relationship manager with Wells Fargo Bank.
Smart Business spoke with Milder about exit strategies and succession planning options and why succession planning is so important to today’s business owners.
What are some of the different succession planning options?
The owner can sell the business to employees via an Employee Stock Ownership Plan (ESOP), to family members via a family succession plan, to other owners or key employees through a buy-sell agreement, or to a competitor or other third party.
An ESOP allows employees to acquire beneficial ownership in the company as an incentive to remain with the company and a reward for valuable service. For the business owner, an ESOP can provide a guaranteed, in-house market for the business. As an ESOP can be complex, it is best to consult with a team of experienced advisers before proceeding.
Often, a business owner will want to transfer the business to family members. It is critical to have a family succession plan in place to make this transition go smoothly. Among other things, the business owner will want to address how to treat those family members who are active in the business versus those that are not.
If the business owner might want to sell to partners or key employees, it is important to have a good buy-sell agreement in place. The buy-sell agreement can address the various contingencies for an owner’s exit from the business, including a voluntary sale, death and disability. The agreement can define the terms of the sale, including how to determine the sales price and any financing terms.
For some business owners, an outright sale to a competitor or other third party may be the best approach. The owner will want to take appropriate steps to maximize the value of the business before putting it on the market, and will also want professional help to market the business and evaluate offers.
The right option will depend on the nature of the business and the owner’s goals. It is important for the business owner to have a team of experienced advisers to help evaluate the different choices.
How important is it to review the plan and make any necessary changes?
It is extremely important to review the plan as often as there are changes within the business, with owners, within the industry, or with the applicable rules and regulations. Tax law changes may also affect the plan. Change is inevitable so owners must always make sure they are prepared and all plans for the business are current. This should also include the owner’s personal financial, trust, investment and estate plans.
How should a business owner communicate the succession plan to employees and prepare them for the owner’s exit?
The best way to communicate to employees is by delegating responsibility and establishing the go-to people. When you start transitioning, you must relinquish some authority. The employees will see how the transfer influences the key personnel and then the conversation becomes easier. You cannot make everyone happy in the choices you make to replace yourself or the changes in key management, but you can keep their loyalty with constant communication of changes ahead.
How can a business owner maximize the value of the business in preparation of a sale or transfer?
There are several ways to increase the value of a business. Among other things, the business may want to ensure its books and records are in order, lock in key employees who might otherwise leave, reduce expenses and strengthen the management team so that they can run the business without the owner.
How important is it to have a financial adviser involved in the process?
I believe financial advisers play a crucial role in developing and implementing a successful exit strategy. Without the help of experienced advisers, an owner may miss opportunities to maximize the company’s value or run into tax problems or other issues.
Here at Wells Fargo, we have groups that specialize in helping business owners with their financial and business succession planning. They work with the business owner to define goals, evaluate different options and implement the strategy the owner chooses.
What would you say to a business owner who is reluctant to address succession planning?
Now is the time! At the very least, every business owner has the responsibility to address the contingencies of his or her disability or death. However, the right planning can also put more money in the business owner’s pocket if the owner sells while alive. Ultimately, having an exit strategy demonstrates the business owner is in control and focused on an organized and profitable transition.
Kim Milder is a vice president and senior relationship manager with Wells Fargo Bank. Reach her at Kimberly.Milder@wellsfargo.com or (281) 587-3037.