What should an owner’s objectives be and why is it so vital to establish them at the beginning of an ownership transition planning process? In “Business Owner Survey” we learned that business owners are not establishing transition plans necessary for them to effectively transfer ownership of their businesses when the desire. One of the first steps you can take is to establish your objectives and goals for your eventual ownership transfer.
“When a man does not know which harbor he is heading for, no wind is the right wind.” – Seneca
Speaking to business owners today he might say, “ownership transition planning for business owners must start with knowing your goals and objectives; otherwise, failure may be inevitable.”
Dave is the owner of a millwork company. He had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. He was ready to retire at age 60, after years of procrastination.
Dave has already decided on two of the critical exit objectives all business owners must answer. He’s determined how much longer he wants to work in the business – he wants to leave sooner rather than later. Second, he has decided to whom he wishes to transfer the business, his son and a key employee. But he still needs to determine a third, critical, objective. How much money does he want or need when he leaves the business? And, does that money need to be in cash or would he accept a promissory note?
Like many owners, Dave had two choices. First, he could retire now and sell the company for cash – but not to his son and key employee. They had no cash and no bank would lend even close to the amount of money needed to finance the purchase. If Dave wanted to sell now and achieve financial goals, he would have to sell to an outside third party with financial resources. Second, he could sell the company to his son and key employee – and wait ten years to receive the entire purchase price.
Dave’s situation illustrates why setting consistent and attainable objectives at the beginning of the transition planning process is crucial.
The three primary objectives common to nearly all business owners, and the questions that must be answered in setting these objectives, are:
- Timetable for leaving the business. How much longer do you want to remain active in the business?
- Financial stability of the business. Think of financial stability as a stream of after-tax income, adjusted for inflation. How much income will you need for the rest of your life after you leave the business? Do you want a lump-sum purchase when you leave the business or are you willing to receive the purchase price over many years? What are the tax consequences of each? Can you increase the amount you receive by structuring the transaction?
- Transferring the business to a particular person. To whom do you want to transfer the business? To a child? Key employee? Co-owner? Or perhaps to an outside party who can pay top dollar for the company?
If you prefer to leave your business on your terms, you must develop specific, consistent, attainable goals and objectives. These objectives are the underpinning for all subsequent planning – in Seneca’s words, “the harbor you must head for.”