Deborah E. Finch, CPA/ABV, CVAYou’ve built a great business, and you love what you do. Retirement is a long way off, so why worry about how you’ll transition the ownership of your company down the road? Like many business owners, this may be what runs through your mind every time someone mentions ownership succession planning. However, there are several important reasons to start the planning process now, even if you don’t intend to start relinquishing control of your company in the foreseeable future.
Value
For most business owners, the value of their company typically represents one of their greatest personal assets. Yet many don’t truly know what that asset is worth or, just as importantly, what key performance metrics drive the value of their business. Without understanding these important concepts, planning for ownership succession and, ultimately, for retirement becomes a guessing game at best. In contrast, owners who know where they’re starting from and what actions will increase company value over time are constantly looking to implement these strategies. In addition to building stronger businesses as a result, these owners are also well-poised for unexpected opportunities that may arise, such as an external offer to acquire or merge with their company.
The Next Generation
Finding, attracting and retaining employees can be difficult. Harder still is the task of recruiting and developing key employees who can assume management and ownership roles in the company. Mentoring employees for these important responsibilities can require a significant investment of time and effort, particularly in terms of developing the professional networks and “rainmaking” skills necessary to maintain the business in the future. And generational differences in attitudes toward business ownership, risk, and work-life balance present additional challenges for the baby-boomer generation looking to sell.
Once key employees have been identified or recruited, offering them the opportunity to participate in the ownership and management of the company, even in a minority capacity, will not only help to further develop them as the next generation of leaders, but will almost certainly help to retain them in the business.
Funding
So, you have an idea of what your business is worth, and you already have the right people in place to take over the business and run it successfully, so why start planning now? Because,absent an offer from an outside company to acquire or merge with your business, transitioning the significant value that your ownership interest represents to key employees within the business will generally take many years to accomplish.
Since individual employees often lack the financial resources necessary to finance the purchase of a company, and external financing may be constrained by the borrowing capacity of the business, funding for internal ownership transition is almost always accomplished with operational cash flow in the form of cash bonuses, stock bonuses, and/or installment notes. As a result, establishing the performance metrics to incentivize key employees to earn the bonuses needed to purchase your shares is critical. Allowing sufficient time for these transactions to occur is essential to the plan’s overall success. In many instances, it can take as much as a decade and sometimes longer for the gradual transition of ownership to the next generation.
The Unexpected
Finally, sound business planning should always contemplate the unexpected, whether in terms of death, disability or the unexpected departure of an owner or key employee (often referred to as “events of transfer”). Determining the value of your company and the metrics that drive that value, developing an ownership transition plan to model future transactions and cash flows throughout the process, and establishing a buy-sell agreement to address the many uncertaintiesof unforeseen events are all important components of ensuring that costly business interruptions will be minimized, and the value of your investment is protected.
Now Is the Time to Start
Whether you are anticipating retirement or looking to maximize the value of your company and attract and retain the best talent, now is the time to start planning for ownership succession. As illustrated above, building the bench internally and transferring significant value to the next generation or poising the company for an external merger or acquisition all require time and careful planning. The best way to start? Build a team of professionals who can assist you with navigating the steps involved in valuing the company, identifying strategies to maximize profitability and value, developing a long-term ownership transition plan, and putting the necessary corporate documents in place to ensure long-term success. This group of key advisors will normally include an accountant, a valuation professional and an attorney, as well as an insurance agent and your personal financial planner. Surrounding yourself with the best consultants possible, and starting early, are essential firsts steps in the process.
