Business transition planning for a closely held business is necessary because eventually, an owner will leave the business in one way or another. Regardless of the way in which an owner departs, a business faces the likelihood of liquidation without proper planning. Under such circumstances, the result is usually a forced sale at fire sale prices.
Why are some owners able to leave their business smoothly and in style, while others are never able leave at all? In many circumstances, the business owner is their own greatest roadblock. For many business owners the idea of planning brings up visions of complexity, time commitment, and expenses. And since business owners are always busy, it can be easy to postpone planning for the transition of the business. There is always time… Until there is no time.
Small Steps to Start Overcoming Procrastination
What should a financial professional do when they are faced with an owner who is too busy to plan? In this kind of situation, consider breaking the planning process into the following manageable steps:
Step 1: Set Objectives. Determine the business owner’s retirement income goal and how much cash it will take to satisfy this objective. Also determine when the owner would like to depart the business.
Step 2: Determine Business Value. Since the business is typically the owner’s most valuable asset, it is critical to have an appraisal done to determine how much the business is worth.
Step 3: Preserve, Protect and Promote Value. The key point with this step is to get the business owner to work on the business and not just in the business. Specifically, in this step it is important for the owner to focus on factors that affect the value of the business such as increasing cash flow, developing operating systems, building a strong management team, and grooming successors. These are not new factors, but steps that the owner should be taking to build the business’ value.
Step 4: Identify and Assess Transfer Options. In this step, the owner needs to determine whether the business will be transferred to an outside or inside buyer. This step includes an assessment of the strategies in place to accomplish this transfer.
Step 5: Contingency Planning. This step involves addressing the risks that are likely to occur if the owner unexpectedly dies or becomes disabled. Consideration in this step should be given to the needs for disability, long-term care and life insurance coverage.
Step 6: Wealth Preservation Planning. The final step is making sure strategies are in place to protect the wealth of the owner and their heir(s). Transition planning must consider the impact of income, gift, and estate taxes. It should also consider what is to be transferred to heirs not involved in the business.
How Can DBS Help?
Planning is key to developing a successful business transition strategy. To help you with the design of your business transition cases, call Terri Getman, JD*, CLU, ChFC, RICP, AEP (Distinguished), DBS’s in-house advanced case design resource.