For many small- and medium-size business owners, the concept of “business transition” planning is a novel idea. With the majority of their day spent building a company, the idea that things may someday progress without them seems implausible.
But as a company grows — a franchisor’s concept catches the public eye or a franchisee opens additional locations, for instance — the concept begins taking shape. The owner realizes that a college-aged child stands to be a likely participant in the family business; or perhaps the company’s success has caught the eye of its larger competitors, who begin inquiring about a possible acquisition.
In either case — or none of the above — as you continue to build your company and accumulate wealth, a business transition plan becomes a prudent, tax efficient tool.
Built to order
Business transition plans are not one-size-fits-all. Every business owner has unique goals — whether that’s an exit strategy, passing the business along to family members, or taking on investors. But once those goals are established, a precise tax plan can be built to further them.
When developing your plan, it’s helpful to view your business in much the way that a prospective buyer might, performing “sell-side due diligence” that assesses every facet of operations. It’s a proactive approach to determining and then maximizing your company’s value.
For instance, if you’re a franchisor, a prospective investor/buyer will look carefully at your franchise network to determine whether there is operational consistency. If not, they might reduce how much they’re willing to value the business. Sell-side due diligence helps determine any pre-sale inconsistencies, allowing you to address them so that when it becomes time to consider a transaction(or some other transition goal), your company’s position is strengthened.
Of course, a business transition plan is more than just tax planning. Some owners have emotional and monetary investments in their company and are focused on securing strong leadership in their absence. Leadership management training is an area that a strategic transition plan can address. And even for those owners who are looking for an exit strategy, the leadership and management training focus can be paramount, for it provides a prospective buyer with the reassurance that succession will be seamless.
If the company is a closely held family business, there are almost always family dynamics at play. If you’re considering a family transition, you need to assess the strength of the relationships between non-family member management teams and family members, as well as the individual strengths of those poised to become part of a future Management team.
Early and often
Business transition planning is not a one-and-done proposition. Goals and interests change, and what you wanted a decade ago most likely is not what you’re interested in or what the business needs now. It’s important to engage an advisor regularly who can review your plan and revise things according to current goals and financial standing.