Your business is likely a large part of your financial success. Even after you eventually leave your business, you may still rely on your business to achieve financial security. This often means that you need to prepare for the next generation of your business.
Whether you plan to sell to a third party, complete a sale to a non-family insider, or transfer the business to a family member, there are several steps you can take to position yourself and your business for success after you no longer hold the reins.
Step 1: Know what you need
Your financial security is the most important element of planning for a successful future. Knowing how much money you need to achieve financial security before you begin to consider what the next generation of your business will look like is crucial.
It may be tempting to take a guess at how much money you’ll need after you leave your business. However, guesswork could create scenarios where you find that you don’t have enough money after you leave your business, potentially forcing you back to work after you retire.
Avoid a common error in planning for the next generation of your business – don’t choose your successor before determining your financial security number. This is because your financial security number may guide you toward your successor. The opposite isn’t always true.
For example, say you want to transfer your business to family members. However, you may find that those family members cannot pay you the amount of money you need to achieve financial security. If you had plans to stop working entirely after you sold the business, transferring to family members may not be the best solution for you.
Allowing your financial security number to guide your decisions tends to give you the best path toward exiting your business on your terms. Therefore, this is a good place to start when planning for the next generation of your business.
Your advisor team will likely play an important role in determining how much money you need for financial security. Certain elements—such as how long you and the people you support will live after you retire, your spending habits, and what you plan to do after you leave your business—will help your professional advisors find the right number for you.
Step 2: Create a written plan
Putting your plans in writing can provide you with several benefits.
- Keeps you on track: It’s tempting to be reactive when planning for your business’ success. A written plan helps you stay the course while providing flexibility when needed.
- Establishes responsibilities: When everyone’s responsibilities are in writing, it makes it easier to track success and address shortcomings.
- Uncovers gaps: Planning for a successful future is complex and involves many moving parts. Putting your ideal path in writing can illuminate gaps in your planning, which allows you to address those gaps earlier in the process and helps you avoid the need to start from scratch later.
Step 3: Determine buyer interest
A challenging part of planning for the next generation of your business is that your decisions may not be entirely in your control.
Many small business owners dream of selling their businesses to family members or company insiders. This is certainly a possibility, but only if those insiders or family members want to run the business.
Determining whether your targeted buyer is interested in ownership is an often-overlooked step in planning for the next generation of your business, especially if you’re considering a transfer to family or insiders.
An unfortunately common scenario for business owners is finding out that the people they wanted to transfer the business to have no interest in owning it.
Your advisor team can help you determine whether insiders or family members are interested in ownership; gauge whether your targeted buyer(s) will allow you to reach your financial security goals; and vet targeted buyers for their ability to keep the business running successfully after you leave it.
Step 4: Don’t taint the marketplace
On the other hand, if you intend to sell to a third party, determining buyer interest prior to putting your business on the market is still important.
Putting your business on the market before it’s ready for sale could taint the marketplace. Tainting the marketplace happens when you put your business on the market, discover that there are no buyers or the offers are well below what you need to achieve financial independence, and therefore, pull the business off the market.
Future efforts to sell the business may be more difficult if you do this because potential buyers will wonder why the business didn’t sell the first time, which could lower the perceived value.
A powerful strategy for avoiding tainting the marketplace is assuring that you have installed as many value drivers in your business as possible.
Step 5: Install value drivers
Value drivers are elements of your business that make the business more valuable to potential buyers. Whether you’re selling to an insider, a family member, or a third party, strong value drivers could help you meet your financial goals and exit your business on your terms.
There are many potential value drivers your company can implement; perhaps the most important value driver is next-level management. These are the people who will run the business in your absence, allowing the business to thrive without you, which can make it much easier for you to sell your business on your terms.
In fact, next-level managers often help bolster multiple value drivers while you’re still in the business. For example, they may identify competitive advantages, scale your operations, make your business resistant to commoditization, or find new markets for your business to enter.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.
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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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