What your clients need to do now to prepare for their company’s future!
Whether the reason is retirement, health, lifestyle or simply “cashing in,” making a decision to sell/transfer a business to a new owner is momentous. If your client is nearing retirement, he/she has likely spent most if not all of their career building up the business – so handing it off to someone else is no small task.
There are numerous considerations involved in making the most of divestiture in the business. These involve a wide array of personnel issues that are important in a successful transition. As such, a team of highly experienced financial, legal, marketing, human resource, wealth management, real estate and other professionals may be necessary, depending on the situation.
What are some typical succession/transfer options?
There are numerous structures for transitioning a business, each with pros/cons that help to determine a solution for your client’s particular situation. Here are six of the most common:
- Sell to family member(s)
- Sell to partner(s)
- Sell to employees via an Employee Stock Ownership Plan (ESOP)
- Sell to management team via a management buyout
- Sell to another company (typically in the same industry)
- Sell to a private investor
How can a CPA help?
It has been said “If you take care of the finances, everything else will take care of itself.” This saying can be applied to business succession planning, in that financial issues typically drive the transaction.
An experienced CPA, such as MyCFO, can help with these issues when selling to outsider buyers:
- What is the value of your business?
- If you plan to sell (vs. transfer), how can you maximize the purchase price?
- What is the best payment structure, given your income needs, taxes and the financial ability of the buyer?
- If you have partners, how should your buy-sell agreement be structured?
- What financial statements are necessary for buyers, and how many years of history?
- Are financial statement projections important?
- What are the most effective ways to minimize taxes on the transfer?
- How can your personnel be prepared for the transition?
… or addressing key items when transferring to a family member, such as:
- If you intend to transfer to family, what are the gift planning and your income planning considerations?
- If maintaining ownership within the family, what are pros/cons of entity selection such as Family Limited Partnerships or Limited Liability Companies?
- How to recapitalize equity?
- Should assets be transferred into a Grantor Retained Annuity Trusts?
- How can you effectively mentor your next-in-line?
- If you have multiple children but only one is getting the business, what are options for equitable estate planning?
What are other short- and long-term considerations?
If your client is many years from retirement or transitioning the business, a succession plan is still a good idea. Consider the impact of a disabling accident to the owner or top management; how would it impact the business? Would revenues decline, employees leave, customers depart and overall value plummet? Key-man insurance may be an option but is likely only part of the solution.
If it is a partnership, is a buy-sell agreement in place? How will remaining ownership replace the expertise of the departing partner?
There are many scenarios that support having a succession plan, even when cashing out or transferring may be planned for decades away. Consider working with a CPA to develop a succession plan, no matter the time horizon. For example, if the timing for divestiture is a couple years away, a CPA will likely suggest working on bookkeeping and financial statements to help achieve the best valuation. Further, succession planning shouldn’t be a one-time event instead an ongoing process that needs to be tied to day-to-day operations.
How can MyCFO help?
According to the U.S. Small Business Administration, in the next 10 to 15 years approximately 70% of privately owned businesses worth an estimated $10 trillion will exchange hands. This exchange will represent the largest intergenerational transfer of wealth in U.S. history.