A business succession plan, like an estate plan for an individual, is something that requires clear-eyed, strategic thinking. It’s not something to put off until it becomes an urgent necessity. In fact, thinking through an exit strategy earlier than a business owner may think it’s necessary can help facilitate a successful exit. The type of planning required to address succession issues in the future can help build effective business practices and keep management focused on long-term goals today.
In this blog, we address some of the important business succession planning issues that small to midsize business owners, along with their business attorney, should be thinking about as they plan their exits.
It’s Important to Have Realistic Expectations
In Silicon Valley parlance, a startup company that achieves a $1 billion valuation is called a unicorn. But if you follow the technology, financial, and investing media headlines, you wouldn’t think that such a feat was rare at all—it’s all you hear about.
The media amplifies the extremes, good or bad. But the business world we mere mortals occupy often isn’t that exciting. Companies aren’t going public at huge valuations. Founders aren’t cashing out and living large. Businesses aren’t being bought and sold at big premiums.
Most business owners I know and serve are out there under the radar working hard, providing for their families, enabling their employees to do the same, and, hopefully, socking some money away for retirement.
Their businesses are assets, but there is no easy way (such as a public exchange) for them to monetize what they built. At some point, many business owners do want to move on, but because they have so much of their net worth wrapped up in their business, and few options for accessing it, it’s not easy for them to do so.
In some cases, owners conclude that there is no real equity value in their business to sell, so they simply pay themselves out of the business until funds run dry (a slow-motion liquidation) and then close shop. In other situations, when the business is viable without the owner’s involvement, an exit strategy may involve a sale to a strategic buyer, key employee(s) or family members(s).
And there are a host of other scenarios to consider. The key thing is considering them before it’s too late—thinking through an exit strategy before an exit is imminent.
I’ve dealt with a number of business owners who decided they wanted to exit but had not done the thinking or the work necessary to actually do so. Almost always, they had unrealistic expectations about what their business and assets were worth. Proactive exit planning, including conducting a business valuation, would have helped set expectations and clarify options.
It’s rare that a perfect exit strategy will just materialize when a small business owner is ready. It takes a lot of hard work to build a business—so it should come as no surprise that hard work is required to successfully exit a business as well.
Practical Succession Planning Options for Business Owners
One of the biggest benefits of early exit planning is that the process, in itself, can help in achieving the desired outcome. Once an exit strategy has been determined, decisions can be made in furtherance of the long-term strategy, with an eye toward maximizing the long-term value of the business. This long-term focus, in turn, makes the business more attractive to those who might be interested in succeeding to the well-run business being operated with a commitment to growth and profitability.
On the other hand, without a long-term strategy in place, many business owners will operate with a short-term mindset, siphoning off profits instead of investing them back into the business, thereby making the business and its assets less appealing to others.
Some of the succession planning options an owner may consider include:
- The sale of the business as a going concern to a new owner, such as an employee, family member, or strategic buyer, such as a competitor. This type of transaction would be conducted as a stock sale, where the purchaser buys the stock of the company and assumes all assets and liabilities and the purchaser steps into the shoes of the owner. There are a number of methods for financing such a transaction, but one of the most common, particularly when the buyer is an employee or family member, is having the sale price paid out of future business revenues over time.
- Another option is an asset sale. If there is no buyer who is interested in the business as a going concern, the business’ assets, such as equipment, property, customer lists, contract and goodwill, can be sold to one or more buyers. The purchaser(s) then uses the assets for an existing business or operates under a new entity using the purchased assets. The purchaser does not assume any liabilities of the company.
And there are a number of other ways to execute a succession plan. The best exit strategy for your business is the one that best fits your goals and (realistic) expectations. An experienced business attorney can help in both the planning and execution phases.
If your succession plan consists of selling your business, your attorney should be able to assist you in finding a business broker to find a buyer if one is not evident. Once an offer to buy your business comes through, your attorney and your financial professionals should be able to assist you in determining the best method for selling your business.
To exit well, it’s best to start early and think creatively about what one’s options may be, and an attorney can help in that process. To the extent that you would like to discuss and explore succession planning for your business, please contact Zana Tomich.