Let’s face it, if you own a closely-held business, at some point in your business’s future there will be an ownership transition.
Do you want to transition in a way that leaves a legacy business or legacy amount of cash in the bank? Alternatively, perhaps you want to roll the dice and hope it all goes how you see it in your head. If you don’t have a crystal ball, you might want to think about building a succession plan.
You may have put a majority of your life’s work into this business. Planning for a successful ownership transition will help to make sure that you and your family get the most value out of your hard work. If a business is not prepared, an unexpected event (an untimely death, for example) can destroy value – both financial and sentimental — faster than you might imagine. This can be especially true if you are the only decision maker in the business, and everyone looks to you to operate the business.
The statistics on successful transitions of family businesses are pretty dismal. Only 30% of closely-held businesses successfully make the transition to the second generation. Only 10% make it to the third generation. How many generations do you want your business to last?
What is succession planning? It can mean a number of things, but primarily it means doing some strategic planning for your business. For a short time, let’s get out of working IN the business and work ON the business instead.
- Define your long-term goals for the business and for your family. As a business owner, these areas are intricately combined, so think about both at the same time. Do you want to keep operating the business for five, ten, or twenty years? Or do you want your heirs to take the reins at some point? If so, how and when? Begin to have a plan.
- Do you want to transition to family members or a management team? Or, would you prefer to sell the whole thing to someone else and put the cash in the bank? You may not know this answer yet, but start thinking about it.
- Find out what your business is worth today. Is it enough for you to accomplish your financial goals? Don’t forget about the tax you will have to pay before the cash goes to the bank. If the current value is not enough, start working on the business to get the value where you need it. Don’t assume that means you have to grow the business. Maybe you just need to diversify your client base or get rid of a losing division. Perhaps hiring a management team will get you there.
- Are your financial and reporting systems adequate and timely? You can’t start any transition conversation without having financial statements to reference. Invest in this process and, it will pay you back ten-fold!
- Go through “What If” Planning. ‘If this (fill in the blank) happens, then what happens to the business?’ Do your legal documents support your desired actions? For example, if I am disabled and can’t come to work, who unlocks the door the next day? Does someone have power of attorney to sign payroll checks? Is there a key business adviser your family should call? Do they know who that is?
These are just a few of the items that you might address in starting to plan strategically for the future transition of your business. Whatever your goals are, it’s important to start planning today. Without a plan, you might get there, but with a plan you are almost sure to arrive at the successful transition you are hoping for.
Let us know if we can help!
By Teryn Grater
ATKG is a San Antonio-based provider of accounting, tax, litigation support and advisory services for closely held businesses and family groups throughout Texas. We have a Rock Star team of people continuously working to Enhance Your Prosperity!