What’s going to happen to your company when you retire or pass away? It’s something a lot of business owners don’t want to think about, but it’s critical that you address the question while you still have time to do so.
“You potentially have the ability to flush it down the drain if you haven’t planned,” says Jim Andersen, partner in the consulting and business valuation and litigation practice areas at Burr Pilger Mayer.
To make sure that doesn’t happen, and to ensure that your company continues in the way you want it to, the time to start succession planning is now.
Smart Business spoke with Andersen about how to develop a succession plan and how to position your company to maximize its value.
When should you begin succession planning?
The right time is the minute you form your business. There’s no time that’s too early to start. Then, as you go, you’ve got to make sure that you’re identifying key players in your organization, whether they’re employees or family members. You look at what types of options you will have as far as bringing them into ownership and management of the business so you can develop a good plan. That way, if something unforeseen happens, like your death, disability or so forth, you have something to keep the continuity of the business going forward — because, quite frankly, the continuity of the business is your main objective in succession planning.
What are your options in succession planning?
There are three different avenues to look at. The first track is to sell to an outside third party at the highest possible price, making sure you’re maximizing your tax strategies so you end up with the best net after-tax dollars.
Track two is internal transfers, where, ultimately, your key employees can purchase the business. Typically, the business has to be able to finance itself. So you have your employees start buying percentages of the business based upon its agreed-upon valuation, with the ultimate process of having your remaining shares in the company be redeemed by the company itself. So the company would buy you out to finish the process.
Track three is family transfers. You have to figure out how to shift ownership from the parents to the next generation. You’re trying to reduce estate value so that you can minimize estate taxes and income tax consequences to the parents.
Ideally, you plan for all three tracks. The best advice I can give anyone is to plan for all the alternatives. And remember that the plan is a living document. You should sit down with your financial adviser once a year and go over it and make sure nothing has changed. And as part of this yearly succession plan meeting, you should be having your business valued on an annual basis, as well.
How can you maximize the value of your business in preparation of a sale or transfer?
The first thing you have to do is know what the business is worth. Almost inevitably, an owner will be disappointed with the appraised value of his or her company. So the goal is to get the business more profitable in order to have enough cash flow where someone will pay you a premium for it.
With your financial adviser, you need to perform a SWOT analysis (strengths, weaknesses, opportunities and threats) and determine how you can increase sales, decrease costs, increase market share, all of those types of things. Once you’ve done that, hopefully you’ll have driven your numbers up, your profit numbers are greater, and then you’ll be in a position where you can ultimately sell the business.
That rarely happen in less than 12 months, and it’s probably a two- to three-year process.
How important is it to have a financial adviser involved in the process?
It’s the No. 1 thing you want to do. You need to start off with a financial adviser who has experience in the process. That person is the quarterback in the situation and gets an attorney and an insurance agent involved, forming a team to make the whole thing work well.
What would you say to a business owner who is reluctant to address succession planning?
The biggest problem is that most people do not want to talk about their own death, and they don’t want to talk about having to leave the business that they built up. Because of the painful nature of the process, and because of how long it takes and the expense of the process, people ignore it.
But by doing nothing, what will ultimately happen will be much worse than getting it all resolved now and dealing with it up front. You’re really doing your preventive medicine so that when you are ultimately in a position where you plan to leave, or something tragic happens, you have the mechanism to deal with it. If you plan correctly and deal with it up front, a lot of the bad stuff can be avoided.
Jim Andersen is a partner in the consulting and business valuation and litigation practice areas of Burr Pilger Mayer. Reach him at firstname.lastname@example.org.