Whether you’ve built your company from the ground up or you’re preserving a proud family business that’s been passed through the generations, you’ve worked hard to establish a valuable financial legacy. However, the ultimate success of your business — and its value to your family — depends in large part on helping it continue to flourish, even after you retire. When it’s time to pass the baton and transfer ownership of your business, will you be ready?
Whether you plan to transition ownership to the next generation or to a third party — now or 20 years from now — your plans must be mapped out well in advance to ensure both the business’s survival and the return on your investment of time and hard work.
The stages of management succession and ownership transition often represent unique and unfamiliar territory for business owners, full of wonderful opportunities but also complex challenges. However, with proper planning, you can meet these challenges head-on and easily answer a number of important questions, including:
&bull Are your successors prepared to fulfill your role in the business?
&bull Can your management team execute your strategic plan effectively in your absence?
&bull What additional incentives can you offer key management to retain them?
&bull Does your bank know your successors and understand their future role in the company?
&bull If something happens tomorrow, can the company continue without you?
&bull Can you ensure that each of your children is treated fairly — both those in the business and not?
&bull Are your family members and key employees aware of your transition and estate plans?
Effective leadership
Nothing is more crucial to your business’s ongoing success than the quality and depth of your management team. Planning for management’s continuity and growth ensures that your business will remain financially healthy and continue its established business culture.
By definition, however, management succession is about change. If current management isn’t performing at an optimal level or if your current management team is considering retiring when you do, this is a good opportunity to enact changes to strengthen the team’s performance. Your plan should address whether your business has the right people in the right positions.
Financial security
Generally speaking, the goal of any seller in an ownership transition scenario is to maximize liquidity. Ideally, transferring ownership results in a win-win situation in which the new owners have the liquidity to fund payments to you, and you gain the resulting liquidity to help you enjoy a comfortable retirement. An effective succession plan can help make this ideal a reality.
A strong plan will also help ensure your business’s ongoing access to capital. In addition to examining your business’s cash flows and net worth, financial institutions are beginning to look for formal succession plans when determining the amount of credit to extend to your business. A formal plan, accompanied by the development of key successors, will go a long way toward demonstrating long-term financial viability to your bank or lender.
Family considerations
Succession challenges facing family businesses today are quite different from those of nonfamily businesses. Families often want a successor from within the family who will not only run the business but also continue to represent the family’s values and community legacy.
Some family members may not own or work in the business but still have considerable influence on its future. A family business owner must craft a succession plan that not only meets the different needs of management and ownership but also considers and satisfies a third set of stakeholders: the family members themselves.
A family conversation is a good first step toward navigating the process of family succession. Inviting all stakeholders to engage in this conversation allows everyone to offer his or her input about the final plan.
The time is now
Succession planning requires just that: planning. Yet many business owners aren’t motivated to act until ownership transition is a clear, present and pressing need. Unfortunately, by then it’s often too late in the game. By focusing on creating a comprehensive succession plan now, you can increase the likelihood of a successful management and ownership transition in the future.
Dan Gaffney provides tax planning and business succession solutions to closely held businesses, high-net-worth individuals and families. He can be reached at 425-303-3195 or dan.gaffney@mossadams.com.
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