Planning for Your Inevitable Business Ownership Transition
By Maurie Cashman
About two-thirds of nearly 1,000 business owners surveyed recently by Pepperdine University’s Private Capital Markets Project expect to transfer ownership in the next 10 years. Extrapolating that out means that nearly 6.5 million businesses will change ownership in the next 10 years. However, only 22 percent of you have reported doing a great deal of succession planning. So what are you waiting for? Don’t you think you should put plans in place to prepare you and your family for one of the biggest financial events of your life?
Some of the best research into “replacement ratios”—by Aon Hewitt and Georgia State University—has found that a good benchmark for how much of your pre-retirement income you should have saved is 85%. These figures indicate the importance of creating an Ownership Transition Plan today that enables you to help achieve your financial and lifestyle objectives after you leave your business. If you have been uncertain about how to begin preparing for your voluntary – and inevitable Ownership Transition – because you don’t understand the process or even know who to turn to for help, don’t fret. Fortunately, a deliberate, adaptable and customized Ownership Transition Planning Process exists that business owners and their advisors have been using over the years to ensure that owners leave their businesses on their own terms and on their schedule.
Ownership Transition Planning is neither mysterious nor time-consuming. The purpose of Ownership Transition Planning is not to sell you a product – it is to achieve your financial and lifestyle objectives. Business owners achieve their Ownership Transition Objectives when they leave their companies when they want, to whom they want and with the amount of cash they want. Ownership Transition Planning provides owners with the keys to running their businesses so they can leave them on their terms.
What exactly then is an Ownership Transition Plan that will allow you to leave your business on your terms and how do you create it? There are an almost infinite variety of businesses and business owners. Consequently, each owner’s exact Ownership Transition Plan will vary, yet almost all contain common elements.
If you can answer “yes” to all of the questions, then you are well on your way to developing a successful Ownership Transition Plan. If you are like the vast majority of business owners; however, these questions will highlight areas where you need to focus your Ownership Transition Planning efforts.
- Do you know your primary planning objectives for leaving the business, such as:
- Departure date?
- Income needed to achieve financial goals?
- To whom you want to leave the business?
- Do you know how much your business is worth?
- Do you know how to increase the value of your ownership interest through enhancing the most valuable asset of the company – the employees?
- Do you know the best way to sell your business to a third party, with the goal of maximizing your cash, minimizing your tax liability and reducing your risk?
- Do you know how to transfer your business to family members, co-owners or employees, while paying the least possible taxes and achieving your financial goals?
- Have you implemented all necessary steps to ensure that the business continues if you don’t?
- Have you provided for your family’s security and continuity if you die or become incapacitated?
If you are like many business owners, you may only be able to answer “yes” to a few of these questions. If you are going to successfully transition ownership your business, though, you must be able to say “yes” to each and every one of the questions listed above.
Over the next few weeks we will discuss the advantages and disadvantages of various ownership transition paths, such as transferring ownership to children, selling to key employees and selling to an outside third party. Understanding these paths will help you in formulating the timing and details of your Ownership Transition Plan.