Successful Business Transitions
I recall as two of my daughters were nearing the end of high school, the college testing and application process became a daily discussion. Fortunately, this was something we had been preparing for all their lives. With our help and sound planning on their parts, they were able to put their best feet forward and gain acceptance to the short list of schools they selected to meet their future goals.
College preparation is similar to successful business planning — from creation to succession and everything in between.
Being a business owner means making sacrifices that blur the lines between work and home-life balance. Long workdays, missed school and sporting events, and no or limited vacations are common. These sacrifices are made to pursue and achieve the goals of the business and strengthen the family’s financial future in the process.
Let’s face it, most business owners get laser focused on the day-to-day operations. They make the all-too-common mistake of not planning for the future — for either themselves or the business. Combine that with the often emotionally charged issue of succession, and it is all too common to put this planning aside for tomorrow. That can be a recipe for disaster when it comes to the business, not to mention the always complicated family business’ dynamics.
Below are examples of some of the succession planning challenges every business owner deals with eventually:
Rather than procrastinate about succession planning, you should be aware of the advantages of beginning this process early. Whether a business will transition to a new generation or a group of employees, or be sold to new owners, the most successful planning starts 10 or more years before the founder or current leadership generation plans to hand over the reins.
A decade may seem like a long time. However, the best succession planning allows you to deal with the complex issues listed above. That also may include structural changes to optimize taxes or changes to your estate planning. If your business is closer than that to a transition and you have not developed a succession plan, it's not too late. But the clock is ticking.
Similar to the process our children use in determining which college will help them attain their goals, the key to preparing for a successful transition is having clear and prioritized long-term goals. This must be done keeping in mind the emotionally charged topics listed above.
There are key questions to answer to start that process. What does success look like for the owner(s) and the business? What is the ideal time for change? Who is going to lead the organization and are they ready? If they aren’t, when will they be and how will they prepare?
Considering these questions and having robust discussions about the answers can help you determine the ideal outcomes. There are always tradeoffs, which is why a succession plan will clearly prioritize the goals of the business owner(s). Your main priority — whether it’s your future business success, taking care of employees, optimizing a potential sale price, or being fair to your family — may change based on your perspective. And realistically, most or all of those will come into play.
Having clearly identified goals as the foundation for your succession plan before you seek critical assistance from attorneys and CPAs can make the process more manageable. An independent third party can be a real asset to helping facilitate these discussions.
There are some other key aspects of each family business to consider while going through this process:
What’s your business really worth? Valuing a business is challenging, but that is often a key part of the succession plan. You will want to use a seasoned CPA accredited in business valuation. Understanding the true value of the business will help with other issues, including the right business structure, setting realistic expectations, and establishing the growth targets that might be necessary to achieve your goals.
Is this a business or a job? An often-overlooked distinction is that nobody wants to buy a job. A company where the owner is doing all or most of the work and is the primary brand has limited salability and may be valueless.
What is the next generation’s interest? Too often business owners are surprised to learn their children have no or limited interest in taking over the business. Have this discussion early so that you can avoid being blindsided by what may be a huge hurdle for the business and its future success. That includes leaving the next generation feeling duty bound and resentful.
How will competition impact the company value? Every successful business must stay ahead of a constantly changing business climate, competition, and technological advances. Maintaining a competitive edge is critical to positioning any business for a successful transition. A diverse client base is often the key to the health and value of a business.
What about constituents (family, partners, employees)? Through the entire transition process — before, during and after — facilitating clear and timely communication with constituents in a way that appreciates their perspective helps keep everyone on the same page and avoids hurt feelings.
At Baker Boyer, we have helped family businesses thrive for more than 150 years. Our role is simple: To help our clients get all the issues on the table and help them make the best decisions for the long-term success of their family and their business.