Business Succession planningSubmitted by Northeastern Wealth Management on March 2nd, 2017
An ownership interest in a privately owned company is likely to be the business owner’s most important asset. In most cases, it will be where the owner is employed and be the principal source of income for the owner and family. In terms of value, the business interest is also likely to be the owner’s largest single investment. Finally, the business (along with other business-related assets such as real estate from which the business operates) will typically comprise the majority of the owner's and the family’s total net worth. When the owner exits the business, everything will change.
For an asset of this importance, you would think that owners would spend a great deal of time planning for what will happen to the business when they are no longer around. After all, every business owner will exit his or her business at some point in the future. The important question is how and when. Will the exit be voluntary where the owner decides that it is time to pass ownership to others? Or will it be involuntary and occasioned by events beyond the owner’s control such as death, disability, deteriorating health or for other reasons? Whatever the triggering reason, advanced planning is critically important to help assure that the transition event proceeds as smoothly as possible under the circumstance in which the exit event takes place.
And yet, few owners spend much time on exit planning as an integral aspect of the business management process. This is regrettable because it leaves important questions unanswered including the following: (a) How will value be extracted from the business to help provide for the owner's and family's lifestyle maintenance, retirement income and other financial security needs following the exit? (b) What steps, if any, need to be taken to get the business ready for transfer to new owners? (c) When, how and to who should transfer of ownership occur? (d) What steps can be taken to make the business more attractive to a potential acquirer? (e) How can the prospects for survivability and future success? These and other questions are far too important to be left to last minute consideration once a decision to exit has been made.
Failure to have a formal exit plan in place may force the owner to compromise his or her objectives or limit the choices that otherwise might have been available had a plan been put in place well in advance of the exit event. For example, the need to structure the transaction the satisfy the post-exit financial needs of the owner and family may force the owner to accept a transferee, transaction structure or deal terms that are not what the owner would have preferred because that will be the only alternative that will address the owner's post-exit financial security requirements? In the worst-case situation, the exit may need to be postponed or put-off indefinitely because there is no viable exit strategy that will provide for the required post-exit financial security of the owner and family.