Several business platitudes come to mind for owners of closely held businesses that do not consider succession planning a priority, including “begin with the end in mind” and “failure to plan is a plan to fail.”
Waiting until the owners are ready to sell or retire to plan an exit transition is not an optimal strategy and usually results in receiving a lower realized value for the business. In a worst-case scenario, no value is received and the business closes.
Most closely held business transitions involve the sale of assets, including tangible assets such as real estate, equipment and fixtures, etc., plus intangible assets such as goodwill, customer lists, business name, etc.
A business valuation will normally be prepared to document the value of these assets. The intangible assets represent much of the value for a closely held business and are a reflection of the ability to generate positive cash flow, plus the relationships with customers and employees that help generate these results.
Rightly so, most business owners focus on the financial and tax issues related to succession planning. Periodic review of the plan with key advisers is critical to achieving success.
Typical succession planning for a closely held business looks at several buyer options to consider, including family members, key employees and competitors. Each of these options has benefits and pitfalls.
For many business owners, the business is their legacy, plus their employees and customers are treated as part of the owner’s extended family.
How best to transition this relationship is dictated in many cases by timing and who is available to successfully run the business going forward.
Family members many times will be employed in a closely held business.
Will some of these family members have the desire and the skills to take over running the business?
Assuming they do, will they be able to afford the buyout payments to the current owners?
Setting out goals and objectives for family members who hope to eventually own the business is key to a successful transition.
Key employees are another option to take over ownership. If done properly, they have been groomed over time in all aspects of running the business.
The willingness of owners to delegate responsibility is a key factor for this scenario. This allows the transition to occur gradually over time.
A noncompete covenant is put in place for the key employee, along with ownership transition via direct payments to the owner, or taxable compensation that is deductible by the business.
Competitors or third parties are another succession option. If no likely buyers are known, sometimes a business broker is used to find potential buyers.
A nondisclosure agreement usually is used so potential buyers cannot use the information obtained to their advantage without consequences.
This method typically is the default option if family members or key employees are not viable options.
FILLING THE TIME
One area many owners fail to consider is what to do with their free time once they have retired.
Most are “Type A” personalities who thrived on being decision makers and making an impact by their presence.
Playing golf or going fishing seven days a week soon loses its appeal to them. So it is important to also consider how the owner will fill the void once he or she transitions their business.
Not too bad a problem to have.
Bruce A. Palmer, Certified Public Accountant, is a shareholder at Buckno Lisicky & Co. (www.bucknolisicky.com) in Bethlehem, a regional CPA firm servicing the Lehigh Valley and beyond. He can be reached at 610-691-0113 or firstname.lastname@example.org.