This post is the start of a discussion about business succession and the personal effect on the business owner. The intent here is to help the business owner identify the commitment she/he must have to deal with the “what ifs” in transitioning from a business owner’s life to a different phase of life.
Consider what happens to your business if you are too sick to be engaged in its management and operations? What happens to your business when you want to retire? What happens to your business if you die unexpectedly or prematurely? If any of the above unmentionables occur, how will your family be affected?
Business owners are living longer and healthier than ever before. Living longer often means the business owner remains involved and in charge of their businesses longer. It is not unusual for business owners to remain active in their businesses into their 80s. The person that motivated me to think of a career in the law was 93 when I met him. At 93, he was an impressive attorney and definitely in charge of his law firm. With many business owners expecting to work into their 70s and beyond, how can business owners ease their transition into retirement while still remaining active in the business they started and grew? Today retirement is a subjective issue. It is a state of mind – a state of mind that varies between business owners.
So, where do you start?
Start with open, candid conversations. Whether your interest in the business transition will be to another owner of the business, to a family member or a sale to a third party, being candid and promptly providing accurate, timely information to the prospective buyer is the primary directive for successful business succession.
A 21st century version of retirement is not clear-cut. The definition of retirement has evolved – it is your personal definition. That is the good news. The bad news is that business owners are not planning for their transition or the succession of their business interest. Some owners are unreceptive to even discussing these topics, as if they are too superstitious to talk about business succession because it is akin to planning for their demise. The subject is then swept under the carpet for later discussion. Forget about improperly planning, too often there is no planning, until it is too late. Prospective clients have said they know these topics will cause stress, frustration or worse. As a result, many business owners never directly address the subject of business succession.
For your business or the family business, planning for your transition and the business’ succession is imperative for the successful continuance of your business and your family’s financial prosperity and harmony. While succession planning may be perceived by many business owners as very important, it is not urgent to them. Assuming that nothing will happen if you don’t get started with succession planning until tomorrow is OK, except when unexpected things happen, and they do.
In tribute to the universal truth that Murphy’s Rule has not been repealed (my apologies to the Murphys), below are 18 items to consider when you begin your conversations to plan for your transition and your business’ succession.
- What your business does and why your business exists. This is more than an elevator pitch.
- The size of your business measured by the number of employees and gross and net revenues, now and when you intend to transition.
- The value of the business as a going concern now and an estimate of its likely value when you want to transition.
- The market value, book value and liquidation value of the business’ assets.
- What you own. What portion of the business do you own now and what do you expect to own when you enter a different phase of your life and want to exit or you must exit? If there is another owner, know the same for that person.
- The time from now until you intend to transition the control of your business. Know the same for any other owner.
- Your financial condition now and when you intend to transition. Know the same for any other owner.
- Your current health and insurability. Know the same for any other owner.
- The existence of a program to motivate key officers and employees to remain for at least three years after your transition and the succession of your business interest.
- Your commitment, and the commitment of any other owner of the business, to the success of the business.
- Whether it is important for you to continue your participation in the business during the time of the business succession and your transition.
- The other business owners’ liquidity to purchase your business interest when you are ready to transition. Whether there are other methods of liquidity available to the other owner(s) so there are funds to finance that person’s purchase of your business interest.
- The law concerning stock redemptions if you do business as a corporation or distributions to members if you do business as an LLC.
- The law concerning the purchase of business assets instead of a stock purchase.
- The restrictions under loan agreements concerning using the corporation’s (or LLC’s) assets to buy your business interest when you want to make a change.
- The personal relationship among the business owners.
- The working relationship among the business owners.
- The members of the team you will assemble to advise and help you succeed in the succession of your business interest and your personal transition. Your team will likely include your attorney, banker, financial advisor, CPA, and insurance advisor. It may also include other advisors such as a real estate expert if your business includes significant real estate holdings.
Starting a business is difficult and not without risk and the same goes for the succession of your business. That is why succession planning is essential to your successful personal transition to a new phase in your life and the security of your family.
If you have business interests and don’t have a succession plan in place, call Stross Law Firm at 813-852-6500 to schedule a consultation with one of our attorneys.
To read more about Business Succession Planning, read our second blog in the series called “Preparing for Change from a Business Owner’s Point of View.”