By: George Rose, Wells Fargo V.P., Business Relationship Manager
If you’re a business owner, it’s never too early to start thinking ahead to the time when you’ll give up day-to-day management of the company. Passing the baton to new leadership can be tricky. Not only are your life and your finances closely intertwined with the business, but there’s an emotional investment as well. But to protect what you’ve built, and to make the most of its value during the transition process, it’s essential that you plan your exit strategy carefully.
Planning should begin earlier than you might think – at least five years in advance, according to many experts. A long timeframe helps to avoid the pitfalls of an unplanned transition, and to make sure that both your own wealth and the business’ finances end up in the best possible condition.
As you start to plan, think about your retirement, your family and your personal goals. One key consideration is the degree of involvement you want to maintain in the company. Will you step away entirely, or keep your hand in?
Your financial goals are a second major concern. Take time to examine your total financial picture and coordinate your wealth goals with your exit strategy. Because the details can be quite complex, don’t try to go it alone. Create a team of advisers – legal, financial, accounting and tax experts who can help you minimize tax liability and ensure a smooth transfer as part of an overall estate plan.
Your business will last long after you give up day-to-day control, and the steps you take now can help ensure its continued success in the future. According to the Baylor Institute for Family Business, business owners who make sound financial retirement plans and transfer control to a clear and confident successor significantly minimize problems with turning over the reins of the company.
Here are three types of transition strategies to consider as you begin your planning;
Retain family ownership and management control. This strategy is best if you want the business to stay within your family and plan to groom a family member to take over management. Talk to your advisers and start formulating four distinct plans; a business strategic plan, a personal strategic financial plan for you and your family, a succession plan, and estate plan. Five to seven years before you intend to transition your business, you should begin to groom a successor so he or she will have a depth of experience by the time you retire. It’s a good idea for your successor to work in all divisions of your business.
Retain family ownership, but not management control. This alternative allows you to keep the business in the family if you have no heirs or you want to pass management responsibility to a non-family member. The same four plans are required as in a family succession, but be sure to include family members in the process so you’ll have a better chance of preventing misunderstandings. In addition to grooming your successor, you’ll need to set up a buy-sell agreement that identifies who will purchase the business, how much they will pay, and how the deal will be financed.
Sell your business to a third party. This could be the best option if your heirs or employees don’t want to or are not suited to manage the business, or your objective is to get the most money for your company. If this is the case, you need to define your priorities. Do you want an all-cash or seller-financed deal? Do you want to remain involved on a limited basis as a consultant? Are you going to sell your business to someone inside – such as an existing shareholder, senior manager, co-owner, or employee – or someone on the outside such as a strategic buyer (owner of a related business, customer or supplier)?
Whichever strategy you choose, you should plan on a full business valuation – a comprehensive, independent appraisal of the fair market value of the company. This will help either to maximize proceeds from a sale or to prepare for sustainability and growth after you leave.
Five to seven years before you plan to transition your business, put in place your advisory team, including a business broker. Then prepare your financials and resolve any legal issues to make your business attractive to buyers. Finally, several years before you get an appraisal, develop a solid management team and spruce up your facilities to increase your business’ value.
You are transitioning a business, not a single event. It is a complex and multidimensional process. By surrounding yourself with advisers who are experts in closely held businesses, you can identify all the appropriate options, make informed decisions about every issue, and ensure that everything you’ve built continues as a strong and lasting legacy.
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George Rose is a Wells Fargo Vice President/Business Banking Relationship Manager. He has served in small business banking in Houston TX for over 10 years. George can be reached via email: george.rose@wellsfargo.com.
