Advanced planning for business ownership transfer
With so many owners reaching retirement, only the best-run, most valuable businesses will command premium sale prices
In theory, business owners have a variety of choices regarding how they will exit their business. Broadly speaking, choices include:
• Retaining ownership as “lifestyle” assets until the owner is no longer capable of running the business
• Planning for the transfer of ownership (during lifetime or at death) to all or a selected group of children or other family members (who may or may not be actively involved in running the business)
• Retaining the business as “an asset of the family” to be run by the family members or outside professional managers
• A sale to co-owners
• A sale of all or a portion of the business to selected employees
• A sale to employees through an employee stock ownership plan (ESOP)
• A complete or partial sale to third-party outsiders (including an initial public offering)
With so many options, it may appear that the owner will enjoy the luxury of deciding how and to whom the business will be transferred based upon personal desires and preferences and what the owner perceives to be in the best interest of the business. However, regardless of how and to whom the owner might want to transfer the business, the exit choice selected will most often be dictated, in whole or in part, by what impact that choice will have on the family’s post-exit financial security requirements.
Absent advanced planning, the method of transfer chosen may have to be based on financial realities rather than owner preferences. However, planning in advance for the future exit event can expand the number of choices that are available to the owner by making sure that financial security concerns are addressed for each favored option.
Advanced planning can also help assure that the business has the best chance of enjoying continued success in the hands of its new owners after the transfer takes place and help assure that the owner and the family continues to maintain a comfortable lifestyle following the transfer, regardless of which transfer method is chosen.
The importance of planning
Every business owner will experience at least one exit event in his or her lifetime. These exit events can be described as planned, where the owner makes a voluntary decision to transfer ownership and maintains some degree of control over the transfer process; and unplanned, where the owner or the family is forced to transfer the business due to an unexpected event, such as the owner’s death, disability or illness.
In either case, if the owner has taken advance planning steps for the exit event, that can make a huge difference in the amount that the owner (or the owner’s family) can expect to receive (or has been able to accumulate) when the exit event takes place.
There are approximately 6 million active transferrable businesses in the U.S. Approximately 70 percent, or 4.2 million, of these businesses were started by baby boomers. As a result, a sizable number of businesses can be expected to change ownership.
It is estimated that approximately 30 percent of these businesses will be transferred within (or retained for the benefit of) the owner’s family. In some cases, the transfer will be to co-owners or employees. However, for the vast majority of owners, the most appropriate or attractive exit alternative will be a sale of the business to a third-party outsider.
But because there will be so many businesses coming on the market over the next several years, it will be a classic buyer’s market. In such a situation, only the best-run, most valuable businesses will command premium prices.
For best-run businesses, you should be congratulated on your success. The premium prices and favorable deal terms that you will be able to command from the buyer will go a long way to assuring that financial security for you and your family will be achieved following the exit event.
For other businesses, the ability to obtain a price and deal terms needed to achieve post-exit financial security is far less certain. Buyers for these businesses, if they can be found, will drive hard bargains, both in terms of price and terms of sale. In many cases, this may leave the current owner far short of what will be needed to provide for a comfortable lifestyle following the transfer.
It doesn’t have to be this way. Proper planning, undertaken well in advance of the anticipated date for the exit event, can convert an average (or “also ran”) business into a business with the qualities and attributes of a “best-run” business.
Paul B. Stevenson of North Hampton provides exit planning and business valuation services for owners of privately-owned businesses. He can be reached at 603-964-3742 or at pbstevenson.com.