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Business Succession Planning: Avoiding the Key
We have written previously about business succession planning (see related articles below), and a recent Wall Street Journal article
reaffirms the importance of giving this topic serious attention. The WSJ article, “Preparing
to Leave,” identifies some of the biggest mistakes business owners make in
preparing for retirement, and it offers some useful suggestions, summarized
below, for how to avoid
Are You Indispensible to Your Business?
If all of the power, talent and
responsibility rest with you, who is going to handle those roles when you are
out of the picture? If your business is too dependent on you, you are setting up
your successor for failure, or you are suppressing its value to a prospective
The future success or marketability of your company depends largely on its
viability in your absence. If you haven’t already done so, start assembling a
capable management team to whom you can – and will – delegate the company’s
day-to-day operations. Accomplishing this vital step now will promote a smoother
transition to the new owner and help your company bring top dollar at sale.
Are You Planning to Minimize Your Tax Hit?
If your succession plan includes
gifting a portion of your selling price, the combination of (a) owning a company
that is growing in value and (b) living in times of uncertainty with respect to
gift and estate taxes could result in a nightmare scenario down the road.
You can avoid such a scenario by beginning the ownership transition now, while
your company is worth less than it will be in the future and while gift and
estate tax rates are relatively favorable.
Do You Know What Your Business Is Really Worth?
It is not uncommon for business
owners to have unrealistic expectations about the value of their company. The
harsh truth is that your business’s market value has very little to do with how much
money you need in retirement, and it has nearly everything to do with what it is worth
to a prospective buyer (even if the buyer is one of your kids).
Effective succession planning requires that you have a reliable picture of your
business’s market value. We would caution you not to rely on simple
formula-based valuation methods; rather, consult with a business broker or M&A
professional who can perform a market analysis, or engage a business valuation
professional who knows how to apply the wide variety of valuation methods to
your business, industry and situation.
Are You Willing to “Go Pro” in Selling Your Business?
Just because you knew how
to build a great business does not mean that you know how to sell it. If you
plan to sell to an outside buyer, taking a “for sale by owner” approach is
almost certain to yield results ranging from unsatisfactory to disastrous.
The benefits of hiring an experienced, well-connected business broker or M&A
advisor – in helping you prepare your company for sale, marketing your company,
identifying the right buyer, evaluating offers, negotiating the best price, and
holding your hand during the due-diligence process – generally far outweigh the
cost of the commission they earn.
With respect to your business ownership, start thinking now about how you want
the story to end. That does not mean you have to come up with all of the answers
on your own; more important, make a list of key questions, and then share them
with trusted people who can advise you effectively.
Coordinating business ownership with your personal estate and tax planning is a
core service of Hoopes Adams & Scharber. To start the process of transitioning
your company and exploring all of the options and opportunities available to
you, schedule a planning meeting with Ron Adams.
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