The very trait that makes entrepreneurs successful – the “roll up your sleeves and get to work” mentality – can become a liability when determining the future of the firm. You risk the continuity of the company and your personal financial health if your succession plan is just to keep working as long as possible.
On the other hand, an effective succession plan maximizes your personal net worth while also ensuring the business thrives long after you’ve taken a step back. The key to crafting this plan is to start as soon as possible.
Establishing A Transition Timeline
A common misconception is that a succession plan is the last step in your business ownership journey. This mentality can lead to family disputes or an abrupt handover that chases long-time customers away. Instead, create your plan now and include a timeline of at least three to five years to execute the transition.
If you plan to pass the business to a child or other family member, the transition period should be educational. You can use this time to introduce the successor to staff, the nuances of the local market, and the most important customers.
If you plan to sell to a third party, you will need time to prepare the business for the new owner. This often involves preparing the financial aspects of the company, documenting processes, and locating a worthy buyer.
As an example, consider the following succession countdown which could be used to transition a business to a third-party buyer.
- 3 – 5 years before sale: Build an advisory team, get a formal business appraisal, identify leadership gaps.
- 1 – 3 years before sale: Name a successor, delegate high-level decisions to the successor, introduce the plan to key clients, begin the search for a buyer.
- 0 – 1 years before sale: Find a buyer, finalize the buy-sell agreement, trigger the formal ownership change, announce the new structure.
This example clearly shows that it takes time to prepare the business and clients for an ownership change. By starting with plenty of time to spare, you can ensure a smooth transition that keeps the business running and allows you to exit peacefully.
Valuing Your Business
Whether you plan to sell or gift the company, the fair market value of your firm will likely dictate many of your decisions regarding the transfer. This value is the baseline for your tax strategy, personal financial plan, and the types of buyers you approach.
There are several common methods you can use to gauge the value of your company.
- Asset-based valuation. This approach calculates the value of tangible assets, like equipment and real estate, as well as intangible assets, like branding and proprietary processes.
- Income valuation. Also called discounted cash flow, this process values the business based on projected future earnings.
- Market valuation. This approach compares your company to recent sales of similar businesses to gauge fair value.
Your team of advisors will help you with the valuation process, but an understanding of the possibilities helps you prepare for their official report.
Selling Your Business
Once you have an idea of the value of the company, you must decide how the ownership will change hands. The decision you make will be heavily influenced by your intended successor.
If you plan to sell the company to a third-party, an outright sale is generally the preferred method. It involves exchanging ownership for cash and allows you to leave the company promptly with no residual responsibilities.
If you plan to pass the company to a family member, you can consider:
- An outright sale which the buyer funds with debt or personal assets.
- A self-financed sale where the new owner pays for the business over time.
- Gifting the company to the new owner, which can introduce significant estate tax considerations.
These are the most common options, but you can also use more advanced planning techniques to ease the burden of purchase for your chosen successor. One option is a trust transfer, which involves moving the company into a trust with your successor as a co-trustee. Another option is to use life insurance strategically to allow your successor to purchase the company following your death.
Whichever method of transfer you choose, you’ll need the right team to help you manage the legal transfer and tax consequences. These professionals help you maximize your sales price, minimize your stress, and keep track of the details so you can move forward with peace of mind.
Building Your Transition Team
You may have built the business on your own, but you’ll need a team of professionals to help you leave it without experiencing legal or tax headaches. Your team could require additional members depending on the size and complexity of your company, but it should include the following at a minimum.
- A qualified attorney to draft agreements and ensure a legal transfer.
- A CPA to navigate the tax consequences of the sale or gift of the company.
- A valuation specialist, often an investment banker or business broker, to provide an unbiased opinion on the value of the company.
- An experienced wealth advisor to coordinate the sale with your personal financial and estate planning goals.
A cohesive transition team is important to spot risks that you may have missed and manage the legal and financial implications of the sale. Together, these professionals are tasked with shielding your personal wealth, ensuring legalities are considered, and protecting your reputation.
Preserving Family Harmony With Effective Succession Planning
Often, the most complex part of a succession plan isn’t the math involved. It’s the family dynamics. You may want to keep the business in the family and provide for all those you care about, but these admirable goals often lead to strife.
For example, consider a business owner with four children for which he wants to provide equally, though only one works in the company. If he gifts 25% of the business to each child, he’s creating a recipe for resentment.
Instead, he could use “outside” assets like life insurance, real estate, or investments to provide for the children who are not involved in the business. Then, he can transfer the business to the active child while ensuring their siblings receive a similar inheritance.
This strategy won’t work for everyone, since each family and business is different. No matter your strategy, it is important to keep your family informed throughout the succession planning process. When you loop your family into the decision early, you can explain your reasoning and reduce future conflicts.
Managing Your Personal Wealth After a Sale
The final piece of your succession plan is to prepare for your personal circumstances once you have left the company. You may have new entrepreneurial aspirations or plans to relax during retirement, so you’ll need a robust financial plan in either case.
Your post-sale financial plan should include a clear understanding of your financial goals, tolerance for risk, and estate plan. An experienced financial advisor can bring your plan together and help transform the proceeds of your life’s work into a personalized plan that supports both you and your family.
Plan for Life After Business with Meld Financial
At Meld Financial, we can help you make key decisions regarding the transfer of your business and the investment of the resulting proceeds. Our experienced team will get to know you and your business and make recommendations that support your financial health and family harmony.
We leverage our proprietary wealth management program, Financial Fingerprint®, to distill the most important aspects of your financial life into one easy-to-understand plan that adapts to your changing circumstances. Best of all, it is backed by our experienced team of tax, legal, and investment professionals.
Contact us today to discuss your personal situation and get started.
