Business Succession and Continuity
You have a Financial Plan. That is great but what about your business? Was that considered in your Financial Plan?
You spent many years building your business, you planned out the details for growth and executed them but now what?
What will happen to your business when you decide you want out?
Did you set out a plan so that your business can continue when you sell or if you become disabled or when you die?
How do you set up your business so that it could allow you to have the retirement you want?
If you have not, then you could be making a costly mistake.
You need a Succession/Continuity Plan.
There are three main elements of Business Continuation and they are Business Valuation, Succession Plan, and the Transfer to new ownership.
Let us look at the first element which is Business Valuation
Do you know the value of your business? And I am not talking about what YOU think its worth. I am talking about what someone else will think it is worth. If you are going to sell your business, you will need to know what it is worth, and this is where you may want to get a professional valuation for your business.
A major assumption in a Business Valuation is that it must be a fair market value transaction. Basically, it must be between a willing buyer and seller, and each has a grasp of the relevant info used in the transaction
When obtaining a Business Valuation, you can use different methods, but three common ones are:
A Cost approach This is where you value your assets and liabilities to determine the net worth of the business. You can use Book value or Liquidation Value of the business.
Book Value – You take all the assets including the inventory, cash, receivables as well as any other assets and subtract the liabilities including accounts payable, tax payable, bank loans along with any other debt and adjust for assets that may have risen or fallen in value (current market value)
Liquidation Value – This assumes the business would cease operating and all assets would be used to pay off liabilities and the rest goes to the owner. This method helps to figure out what the absolute bottom valuation would be because anything lower than this value the owner would be better off liquidating the company rather than selling it.
The next is the Income or Earnings Approach. This method assumes that the ability to continue to earn income is the best indicator of its value. The real value of any business is its ability to generate cash flow. Two common formulas that can be used are:
The capitalization of earnings formula. This is where you determine what the average capitalization rate is for your industry and then divide that into the businesses average earnings over a specified period.
Or the discounted future earnings approach attempts to estimate the future earnings of the company then discounts that back to present terms using the risk-free rate.
The third Valuation method is the Market Approach which attempts to determine the value by comparing the company to similar businesses that have recently sold. You then adjust for differences in size, risk, market position and other factors. This is common strategy for real estate agents when selling or buying a house. *
The next element is the Succession Plan.
Over the years not only has your livelihood relied on the business continuing to run successfully but so has your family, your employees, and their families.
What are the business plans for your retirement or death?
Do you have someone that can and will run it?
Would you want to sell to a partner, employees or perhaps to an outside person/organization? Or Would you prefer to sell to a family member?
Keeping the family in the business is often a desire by the founder/owner. There is no question that for a family, business succession planning is the key to running it for multiple generations.
If this is your desire, then make sure that the plans you have in mind are compatible with your families plans.
A few questions that should be considered. Are they intimately familiar with the business i.e. have they been working in the business already? What is their relationship with current employees? Are they willing to own the business?
Answering these questions now would make a big difference in the future success or failure of the business. Planning for the succession of your business in advance will pay ‘dividends’ for you, your survivors and employees.
Once you answered the question of who you would like to sell too then the final Determination is how your business transfers to new ownership.
There are multiple ways ownership is transferred in a business.
If you were to sell to an outside person or entity you would want to consider if it will be a straight sale where you are no longer involved or will it be over time. If it is a straight sale, then will it be all cash or will financing be involved.
If it is to a partner, then will you be selling it through an earn out process or will it be a straight cash sale?
If it is to employees, then an Employee Stock Ownership Plan (ESOP) may be an effective option.
A sale to a family member can be accomplished in multiple ways such as the options listed above or through a Family member transfer where you gift a certain portion of the value of stock to the family member each year. This is a slow process and would often be accompanied with one of the other options listed above.
In closing, Liquidation is an option but that is often due to a lack of advanced planning. This option is often forced upon the owner because she has no other viable option
So, give yourself options.
As the famed writer and lecturer Dale Carnegie said “If you do not design your own plan, chances are you will fall into someone else’s. And guess what they have planned for you? Not much”
Our firm does not provide tax or legal advice. All decisions regarding the tax or legal implications concerning your business should be made in connection with your independent tax or legal advisor.