What Will Happen To Your Business When You’re No Longer There?
Whether you leave by choice or circumstance, now is the best time
to plan for what’s next.
It takes time, talent, and determination to start, run and grow a business,
but did you know it can be almost as daunting to determine what to do when
you’re ready to step back? The decisions you make will have an enormous
impact on the business, your legacy, your family, and your financial future.
Fortunately, trusted advisors experienced in business succession planning
can help.
Consider this hypothetical case of the Johnsons, who are just
starting to think through their next steps.
- 56-year-old James is owner and CEO of Johnson Fittings Corp.
- His wife, 54-year-old Jennifer, is the finance manager.
- They plan to retire at age 60.
- Their son Marcus is the operations manager. He may want to take
over the business one day but his intentions are unclear.
- James has previously told would-be buyers that his company is
not for sale.
- The Johnsons worry about what might happen to their employees
if they sell the business.
What should they do with their business as they prepare
to retire?
Business succession options can be narrowed down into three basic courses of action:†
Wait and See
To wait and see is another way of
saying, “Do nothing and think about
it later.” One of the biggest risks of
this option is that it could force you
to make a quick sale if something
unexpected happens, which could
reduce your financial returns and
negatively impact your employees
and the community. Given the
potential negative repercussions,
it’s prudent to just cross this option
off your list.†
Internal Sale
An internal sale often refers to
transferring ownership to a family
member in the next generation,
which in James and Jennifer’s case
could mean selling or gifting the
business to Marcus. If they choose
to gift him the business, they should
consult with their tax advisor
to mitigate any potential tax
consequences for Marcus.
Another internal option is an
Employee Stock Ownership Plan
(ESOP) that has tax advantages
and also rewards employees by
giving them an ownership stake in
the company.
External Sale
An external sale involves selling to a
third-party, such as a family office,
or a competitor. Family offices tend
to employ a buy-and-hold strategy
and often are not inclined to replace
management, which could bode well
for employees.
“When it comes to business
succession, time is your friend.
The more time you have to
plan, the more choices you
have and the more likely you
are to achieve the best possible
outcome for you, your business,
your family, and your legacy.†”
Dan Griffith
Senior Vice President and Director of Wealth Strategy, Huntington Private Bank®
Selling to a competitor would require
disclosing strategic information,
which could be risky if the deal falls
through. If James and Jennifer were
to pursue this path, they would
want to have their attorney draft
non-disclosure and non-solicitation
agreements for the potential buyer
to sign.
Your decisions about your business
will likely have a profound impact not
only on you and your family but also
on your customers, your employees,
and your community. You didn’t work
as hard and long as you did to build a
successful business only to rush the
exit. Take steps now so in the future
you can look back and be satisfied
with the actions you took.
What Now?
To get started, consider:
- Your personal financial
goals, vision for your
company’s future, and
timetable
- Your key employees
- The value of your business
and tax consequences of
various actions
Download PDF
†Dan Griffith interview, July 26, 2021
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