Succession planning is a lot like retirement planning: For the best outcome you need to start early, reflect on your priorities and consult with experts to make sure you have your proverbial ducks in a row. Just as you should start contributing to an IRA or 401(k) the day you begin your first job, you should start thinking about who will take over your business the day you open it. Planning for succession and retirement should go hand in hand because how you envision your retirement impacts the timing and structure of when and how you transfer your business.
To plan realistically and avoid surprises, you’ll want to get a professional valuation of your company, which gives you an objective estimate of its value. You can work with a valuation firm or a public accountant that has certified valuation analysts on staff, like MMB + CO. Either way, buckle up, because valuations are often eye-opening — in both good and bad ways.
Once you understand your company’s worth — keeping in mind that taxes will take a significant bite out of your proceeds — you can determine when it makes sense to sell and how to structure the sale. For example, if the value in current dollars is enough to support your retirement goals, you can monetize right away. If you’re not confident the amount is adequate to sustain your retirement vision, you have a few options:
This is where it can get emotional. You may have spent years, even decades growing your business, and likely plenty of blood, sweat and tears. Naturally, you want your successor to care about the company as much as you do. You want them to be passionate and committed to its success, your customers’ satisfaction and your name’s reputation. You want to trust they’ll carry the torch and continue your traditions.
The obvious choice is a family member or longtime employee. If that’s not appropriate, you might consider partnering with a friendly competitor or reputable industry peer, or perhaps selling to a private equity firm. For many, liquidating is also on the table, but often as a last resort. These are all viable options, and it’s important to consider the pros and cons of each.
Evaluate potential successors
An adult child is often the first choice to take the reins. If they’re interested and have the experience when you’re ready to pass the baton, you’re in a great position. But it usually takes years of planning for the stars to align, so I’ll say it again: start early.
If and when the timing is right to cede the business to an heir, stay involved, perhaps on an advisory board or board of directors. Decide which functions of your job you’ll pass on and which, if any, you’ll keep. Define and communicate your new roles with your family and staff to make sure everyone understands how processes will change and who will handle each responsibility.
There’s always the chance that while an adult child might be your dream successor, they may not be interested, qualified or able. In that case, you might look to a longtime employee to lead the business before considering an outsider. Current employees offer familiarity and trust; outside hires broaden the pool of candidates. Both require extensive vetting to make sure the potential new leader is qualified for the responsibilities and, equally importantly, aligned with your business’s values and goals.
Bring in a team of advisors
Succession decisions are big and complicated, but fortunately you don’t have to — and shouldn’t — make them alone. Once you’re clear on your vision and goals for your retirement and business, consult with a team of advisors, including a lawyer, accountant, banker and insurance agent. Their individual and collective expertise and perspective will help ensure you’ve thought of everything — and are prepared for anything.
For example, your attorney can help you develop a buy-sell agreement that outlines what happens to your shares when you leave the company and how the valuation will be determined at the time of sale. Your insurance agent can help with life insurance policies that can be used to finance the purchase of the business. Your tax advisor and financial partner can help you maximize the sale price and structure it in the most tax-advantageous way.
This last piece is critical because tax laws are complex and the implications are significant. They depend on a range of factors including how your company is structured — corporation or partnership, for example — how the assets have been handled and how the succession deal is structured. So, before you etch a valuation figure into your mind, sit down with a tax professional to learn about the tax implications of your choices and how you might reduce your liability.
Pave the way for a proud legacy
Once you understand your options and are ready to make some decisions, involve your family and employees. Keep communicating with them every step of the way to continue to strengthen the trust you’ve built over the years. This will help ensure the culture you’ve created will carry on and flourish long into the future. Whether your successor is your child, a trusted employee or an outside interest, you’ll sleep better knowing they’ll reinforce your business’s core values and advance the company in the direction you’ve charted.
Mark Kovaleski is managing partner and chair of the management committee at MMB + CO., a public accounting firm serving the community since 1975 by providing a full range of business advisory and accounting services.r