Many small business owners do not have a plan for the transition of their business. A survey taken a few years ago suggested that only 30% of the small business owners had a transition plan. Out of the 30%, only 50% had a plan in writing. Of those plans, there is no way of telling if they were set up correctly, outdated, or even funded, considering the changing of the business status.
Options available for business owners for the transition of their business:
A structured succession plan would enable the business owner to achieve their personal financial goals as its primary function, which would be to create a satisfactory income, and security for their future.
A second goal would be to maximize the greatest potential value for the business, which would help the owner with their financial needs in the future, such as retirement.
Another goal would be the long-term growth and the survival of the business to support family members for the future, key employees, or if the owner wishes to remain attached to the business, as a passive owner.
One of the key issues is to make sure the business owner has control of the process and has defined the timing of any transition in the future.
For example, if the owner wants to retire in five years, they must make sure they have implemented proper value drivers to maximize the company value. Some value drivers take longer than others, such as building the next level management key group. This is the group that may wish to purchase the business at some point or run it for the owner.
By not implementing this strategy early, the owner may be forced to delay the sale of the business until the strategy is developed, consequently jeopardizing their retirement plans.
If the business is to be sold outright, there needs to be other quality value drivers working for the business owner to maximize the potential sales price.
Overall, by not having a succession plan, and awareness of what value drivers need to be implemented, the owner risks not achieving the highest potential value for the business while weakening the ability to time and control their transition from the business.
Problems of not having a solid transition plan:
- Family equity issues
- Income and estate tax exposure
- Risk not creating the culture of retaining key persons and family members
- Uncertainty for people who have a stake in the company (investors, family members, long-term employee, as an example)
For small privately help businesses, a succession plan is very personal, and cannot be a template program, as every company is unique, and the owners’ situations are very different.
The key to a successful transition is having a solid plan which has an orderly process and is tax efficient.
LEARN THE FOUR WHAT IF QUESTIONS EACH BUSINESS OWNER HAS AND HOW TO AVOID THEM BY REQUESTING THE WHITE PAPER: CHAOS-THE BIG STORY; REPORT #4.