When Business Success Becomes Business Succession

If you’re a business owner, you may have entertained thoughts of what’ll become of your business when you retire.

Those thoughts are sure to focus on one key question: Who will run my company? Typically, the answer is one of three types of owners – a family member, current employees or a third-party.

Deciding the future owner is both a personal and business decision, involving your own wishes and the nature of the company. For example, one owner may simply pursue the highest price and sell to an established company who wants to expand market share. Another owner may have known for years they’re handing over the company to a child groomed to run the business.

To help determine who’ll take over your operation, it’s helpful to identify the exit options available to you and compare the advantages and drawbacks of each avenue. You may develop quite an extensive list, but here a few general pros and cons to get the thought process started.

All in the Family

If you have a son or daughter interested in taking over the business, you could have the easiest decision in succession planning – or the most difficult. Easiest because financial reporting supporting a sale is less involved and, of course, no search is required. But you face a challenge if you believe the child who wants to take over lacks the skills to successfully manage the business.

Your wishes for future involvement also factor in. If you want to maintain some influence over the operation and direction of the business, family succession may provide that opportunity.

Management Buy-Out

Do you have a manager, management team or group of employees who want to buy the company? Whether it’s a management buy-out or Employee Share Ownership Plan, this exit option keeps your people in place and helps ensure a smooth transition. The big question mark in many potential buy-outs is whether the purchasers have access to sufficient capital. Limited funds could negatively impact the price or possibly lead you to finance part of the purchase.

Selling to a Third Party

A common exit option is selling to a similar company or a private equity firm, perhaps with the help of a professional business broker. You often get the highest value selling to a third party, and you have a clean exit if you wish to retire with your business life behind you. But be aware this option may be less than ideal for your management team and/or staff if new ownership reduces their responsibilities or even lets them go.

Timing is a key factor in all of these succession options. You should begin to plan your exit strategy several years before the sale, and the more time, the better. Family succession calls for tax planning, perhaps involving an estate freeze established five or 10 years in advance. A management buy-out can require several years for purchasers to arrange for capital. To get the best price from a third party, you may need a few years to make the company sale-ready.

Choosing an exit option involves input from your lawyer, accountant and financial advisor. To begin the process, talk to your Advisor or contact one of our Advisors about available exit strategies and business succession in general.