Exit - Stage Right or Wrong?
General Business News
Exit - Stage Right or Wrong?
That was when I was young and invincible, but now I've aged a bit and realize no matter what I do, eventually I will grow old, hopefully retire and eventually pass on. There is no other choice.
Unfortunately, there are many out there who still don't realize death is an inevitability and old age and retirement are enviable goals. After all, the alternative to old age is early death and the alternative to retirement is working all of our lives. Neither of these are attractive alternatives.
That's where many business owners are - the denial stage of their own mortality. Who can blame them? They've worked hard, established a prosperous business and if that hasn't killed them, nothing will! Business owners are also often working so hard they have difficulty taking time to plan their own futures, but they should.
One of the cardinal rules in any military encounter is to have an exit strategy even before you enter the battle. This should be true of every business owner also.
Joe was a successful CPA. He worked hard, established a good clientele and even involved his son in the business. Then he died. Unfortunately, the son was not a CPA and the lucrative audit and tax clients left for firms where there were CPAs. These firms had no obligation to pay Joe's wife or son anything for the clients that came there way. The son and wife were left with a diminished practice with much less value than when Joe ran the business. Mrs. Joe lost a lot of money in the deal and her future was much less secure.
Mark was also a successful CPA until he developed cancer. Ultimately, he died, but not before he sold his practice to a younger CPA. Mark's wife collected a percentage of the fees billed to Mark's former clients for the next several years. The clients remained loyal to the new CPA out of respect for Mark and Mrs. Mark. She was able to continue her life in comfort after Mark's untimely death.
Almost True Story
Fred was a successful doctor who died early in life. He left behind a wife and several young children. Fred had sufficient life insurance to protect his family, but he also had a lucrative practice that disappeared overnight because he never made arrangements for it's eventual sale. Frankly, this one isn't written yet, but we'll bet you there are hundreds, if not thousands, of people out there in this same boat right now.
All of these stories have one common thread, something was done or not done with respect to the business' future in the event of the retirement or death of the owner. We've used professionals to illustrate the point, but substitute any business to get the same answer.
Succession planning is one of the most important things business owners can do for themselves, and one of the least often addressed business needs. It's difficult to face one's own mortality or the prospect that one day they won't be able to manage the day-to-day affairs of their "baby."
Succession planning is a systematic approach to determining how management and/or ownership will be handled when the business founder(s) are ready to exit the scene.
Planning is necessary to provide the owner(s) a means of income when they retire. There is nothing more disconcerting than to spend your life on a project, only to find it's worth nothing because you can't unload the fruits of your labor.
Planning is necessary to protect your wife, your children and any other dependents in the event of your timely or untimely death. One of your single biggest assets will likely be your business. However, it won't support your dependents if it blows away in the aftermath of your death.
Planning is necessary to ensure the business' continued success even after the owner has been paid for his interest. Let's face it, no one wants to work all their life only to see their work disappear due to a lack of competent management. A business owner's life, prestige and legacy are generally tied up in their business. Planning can be instrumental in minimizing family feuds. Many businesses have fallen apart in the wake of the scion's death. In the process, many families have been torn apart.
If we have you convinced of the need to establish a plan, it's time for a brief discussion of the steps necessary to formulate a plan:
First, establish the value of the business. This first phase is the easiest because it is mostly quantitative. For a discussion on how to go about valuing a business, please refer to last month's article on business valuations.
The next phase is gather data and establishing values. This part is more difficult because we get into the more subjective realms of goals and personal values. In general, once you know as much about the financial aspect of the business as possible, then you need to find out about the owners and staff. A good plan will take into account the following issues:
- The present owner's goals and their priority.
- Who the management successors will be, or what steps are to be taken to find those successors.
- The owner's future income and cash requirements.
- The method of funding the buyout of the present owner.
- An implementation strategy.
- The effect on the business of a change in ownership.
- What is plan B if plan A doesn't work?
- What is the time frame to accomplish the transfer of ownership and/or management?
- What is the mechanism that will be used to monitor and adjust the plan?
This is just a general discussion. However, if you are a business owner, this process is critical. It is as necessary as any other business planning. The main obstacle you, as the business owner face, in this circumstance, is your own mortality. But, accomplishing that, the rest is just good business strategy. The time is now. Give us a call so we can discuss how you will protect yourself, your family and your business interests well into the future.
Have a great June!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.