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Melissa Halpain, CPA, CVA

Tax Manager North Little Rock

Point A to Point B: Succession Planning for Business Owners

According to the U.S. Small Business Administration Office of Advocacy, 99.7% of U.S. businesses are small businesses. Sadly, only about a third of those businesses make it to the second generation, and less than a handful to the third generation, because the future of the business often takes a back seat to the demanding task of managing daily operations. With a little help and expertise, succession planning can help provide a road map for the future of your company. 

Map It Out. Where do you see yourself down the road? Where do you want to be? The first step in developing a solid succession plan is to decide what you want for yourself and for your company. Would you prefer an immediate retirement or remain involved with the day-to-day operations? A successful transition will occur when your expectations for your company align with the goals of the potential new owner.

Set the Budget. A potential buyer will expect to pay the present worth of future benefits of your company. Owners of privately held companies can sometimes have an inflated idea of the value of their company due to emotional attachment to the time spent and hard work dedicated to developing the business; professional valuation analysts are often employed to assist in determining a realistic value for your company. How much money will you need in order to enjoy your hobbies and maintain your expected lifestyle? Depending on the circumstances, a higher or lower value may be desired: sellers to third parties would prefer a higher value, while a lower value may be beneficial in a transfer of ownership to family or long-standing trusted employees. Remember that is does no good to agree upon a value for your company if the intended buyer can't pay for it within the timeframe you have set. Being flexible will go a long way.

Gather supplies. You wouldn't set out on a road trip without a few comforts from home.  Nor should you embark on the journey of retirement without getting matters in order. Providing a formal written document specifying policies and procedures can ease the emotional strain of worrying how the company will be run with new management in place. Consider banking relationships; will the company be able to obtain operating and capital financing without the personal guarantee of your handshake? Careful consideration should be given to the resources that remain within the company and whether it will be enough to maintain operations in the future.

Shotgun! Who is going along for the ride? Consider whether current management is capable enough to do what you do. Which family members and key managers are willing and excited to carry on the business? How will employees respond to the shift in management? It may be a good idea to offer incentives to crucial personnel who remain loyal through the transition. 

Use GPS. When you're not sure exactly how to get where you want to go, you may rely on GPS to reliably get you to your destination. When it comes to planning the future of a business, attorneys and CPAs can provide valuable assistance in navigating the complexities of valuation and negotiation. In succession planning, not only will a written plan set the tone for your company after your exit, but other professionals may require a peek at your plan in order to extend certain business arrangements to your successor. Before making any final decisions, consider hiring a professional to help you through the nitty-gritty details that can have a lasting effect on the future of your business. No two succession plans are exactly alike, and there may be significant cost and tax savings opportunities hidden around every curve.

 

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