Estate Planning Blog

Navigating Business Succession: A Comprehensive Approach to Business and Exit Planning

As business owners focus on day-to-day operations and growth, the thought of leaving or selling their business often takes a backseat. However, as Frank Fantozzi, a certified exit planning adviser, emphasizes, “for most owners, the business is their largest asset.” This makes succession planning an exit strategy and a crucial part of overall business planning.

The Importance of Early Succession Planning in Business Strategy

Succession planning should be an integral part of a business’s foundation. Delaying this process can lead to complications, especially when unforeseen circumstances like the “5Ds” – death, disability, divorce, disagreement and distress – arise. Early planning ensures that the business remains stable, and its value is maximized, regardless of market conditions.

Core Elements of Business Succession Planning

Strategic Business Planning and Succession

Aligning business goals with a succession plan is vital. This alignment helps identify potential successors early and integrate their development into the business’s growth strategy. As Fantozzi notes, understanding where the business is and where it needs to go is crucial in this process.

Owner Readiness and Transition

Owners must prepare both emotionally and financially for their exit. This preparation involves assessing personal financial needs post-exit and ensuring that the business can meet these needs. Fantozzi points out the importance of understanding one’s cost of living without the business and preparing accordingly.

Business Valuation and Market Readiness

Regular business valuation is key in succession planning. It’s not just about the company’s size but being the best in its class. Fantozzi suggests that achieving ‘Best in Class’ status can significantly impact the value received for the business.

Succession Planning as a Tool for Business Growth and Stability

Effective succession planning is not just about preparing for an exit; it’s a growth strategy. It ensures leadership continuity, maintains business values and can be a selling point to investors and clients seeking stability in their partnerships.

Legal and Financial Considerations in Succession Planning

Succession planning involves various legal and financial considerations. These include the transfer structure, tax implications and ensuring legal compliance. Professional advisors play a crucial role in navigating these complexities.

Challenges and Solutions in Succession Planning

Choosing the right successor, especially in family businesses, can be challenging. Solutions include establishing clear criteria for succession, involving external advisors for unbiased perspectives and considering non-family executives, where appropriate.

Conclusion

Succession planning is a dynamic and ongoing element of business planning. It requires regular review and adjustment as the business and its environment evolve. As Fantozzi concludes, “Your exit strategy connects the dots between business success and a life well lived.” Business owners are encouraged to view succession planning as a vital part of their life cycle, ensuring a legacy that endures and thrives beyond their tenure.

How Can I Successfully Transfer My Business to My Children?

According to ITR Economics, out of the 77 million Baby Boomers in the U.S., an estimated 12 million are privately held business owners.

As ownership of businesses for those born between 1946-1964 is transferred to the next generation, an estimated $10 trillion worth of business assets is expected to be transferred in the coming years.

AZ Big Media’s recent article, “Passing the torch: Considerations for a successful generational business transfer,” explains the best way to have a successful business transfer.

Develop a Strategic Plan.  A successful generational business transfer takes time and planning. You should begin the planning process way in advance of the change in leadership. This can give a family time to define what the future of the company looks like. Determine what technology, human resources, and capital requirements the company needs to be successful in the short and long term. Ensure that the current and future owner’s visions are communicated. If both visions aren’t in alignment, discuss what the future for the business may look like. Balancing long-standing business practices with new changes can mean a sustainable and successful business. Begin integrating the future leader into day-to-day business operations before transitioning. Establishing a clear transfer of duties and mapping out a timeline can help with a smooth transfer process.

Get Finances in Order. Preparing business finances in advance of a generational transfer is critical. The current business owner may consider setting up a grantor-retained annuity trust for their successor. An experienced estate planning attorney can help to create this trust, which earns annual income for the beneficiary receiving the funds with minimal or no gift tax liability upon expiration. Family members may also consider transferring their business to the successor through an installment sale, which is a sale of property where at least one payment is received after the tax year in which the sale occurs. Note that an installment sale could mean a tax benefit for the seller because the overall tax liability is spread out over time rather than all at once during the business transfer. Once you decide on the preferred financial path to conduct the transfer, look at the company’s cash flow and other financial projections. List the projected expenses, liabilities and potential taxes owed, and then identify sources of liquidity to pay them.

Work With Financial Partners. If not already in place, look to assemble a team of trusted advisors, including a CPA, attorney, banker, and wealth advisor. This team can work through the financial aspects of any generational business transfer.

Transferring a business is a major family event involving potentially tough conversations and decisions. This can be a complex process. However, with proper planning, it also has the potential to be an opportunity to achieve new growth and elevate long-standing family business goals.

Reference: AZ Big Media (June 8, 2023) “Passing the torch: Considerations for a successful generational business transfer”