The business world is in for a major generational shift – a recent survey found 79% of business owners plan to exit their businesses within the next 10 years.
The survey, conducted by the Business Enterprise Institute and the Conway Center for Family Business, found more surprising statistics. Only 30% of family-owned businesses succeed in transitioning their business to the second generation, and only 10% succeed in making it to the third generation!
In our 55 years of experience in working with businesses and their owners, we've found those who start planning many years ahead are usually the most successful in transition. Long-term business succession planning also helps greatly in reducing the tax consequences associated with selling or transferring your business.
But before any business owner get started on an exit plan, there are a few basic personal decisions that you and your spouse should discuss.
What does leaving the business mean to you?
- Do you want to sell your business to a third party by a specific date, or depending on if you receive a target value trigger?
- Do you plan to retain ownership until you die, even if you become inactive in the business?
- Do you plan to transfer your business over time to a family member?
What are your family considerations? What legacy do you want to leave for your family?
- It’s best to try to treat both business active children and non-business active children fairly, but depending on their role in the business, that might not necessarily mean equally.
- Do you have plans to provide for your family should you no longer be able to run the business?
And most importantly: What do you want to do after you leave the business? How will you spend your time when you're no longer running your business?
You’ve been a business owner for most of your life, how do you disconnect? Do you dream of a new business venture? Volunteer work? Or more along the lines of a well-earned retirement and a life of leisure?
You should begin with the end in mind when conducting succession planning. What is your exit option? Here are the three most common:
- Die working in the business. (Likely not the most appealing option.)
- Sale to an outside third party. This is sometimes the best option to get the greatest financial return on your business.
- Transfer the business to family members. Upsides of this option is it keeps business and family together and allows the owner to stay active in the business with their children through transition.
The longer you have to make business succession plan, the more options you have. These are three big decisions you have to make – how, when and who?
How: How much money is needed when you exit? With no reliance on cash flow from your business after you retire, you have to plan for financial independence and security for your future.
When: When do you want to leave the business, and when can you do it with financial security? This should be a specific date or narrow timeframe.
Who: Who do you want to take over the business? Your spouse, you child or children or a third party owner?
As business owners, the decisions you make for your business regarding your exit or transition strategy can affect your family, company and your personal financial future. These decisions also could have legal and tax implications for your family and your company.
All business exit strategy plans will be different based upon your personal needs and goals; however all successful exit plans will share these six components:
- Choose your exit date and create a detailed written exit plan
- Choose your advisory team, including your CPA, attorney, financial advisor (at minimum)
- Have your CPA and/or financial advisor work with you to create an accurate Financial Needs Analysis and an estate plan.
- Have your CPA create a Future Cash Flow Analysis and a business valuation so you are dealing with accurate portrayals of your business value and future cash flows to support your exit strategy.
- Ensure you have a strong management team in place helping you run the business throughout the transition
- Time: The general rule of thumb is 3-to-7 years for planning a successful strategy for a sale to a third party and 5-to-10 years for transition to a Next Gen. Remember that each business will have different goals and time frames based on your specific financial situation and exit goals.