When advising our clients, one topic continues to bubble to the surface: business succession planning. While many may immediately think of executives in their 60s looking for a business exit as they chart their course toward retirement.
Currently, we are seeing more and more first- and second-generation owners looking for pathways to grow their businesses. We are also seeing younger business owners interested in changing their current operations or reevaluating their long-term plans.
For those considering business succession options, it’s critical they thoroughly understand their short- and long-term goals and what they’re trying to accomplish—personally and professionally—before they make any decisions. Following are three of the of most common scenarios we’ve been discussing with business owners.
1. Transition with interim planning
In this scenario, the business owner is looking for a transitional approach that will move the company towards succession planning at some point in the future. Typically, this owner wants to pass on the company to their young children and needs a temporary solution until the next generation is old enough and ready to take over. An owner may also be looking to maximize value in a future sale to a competitor or a private equity firm.
Your financial advisor can help with managing third-party valuations, engaging investment banking to put the business out on the market, and offering financial solutions that will fit the company’s needs while you execute the interim plan.
2. Shared ownership and involvement
Another common situation is where the owner is looking to stay involved in their business but wants to carry less risk moving forward. This may include transitioning their company into an Employee Stock Ownership Plan (ESOP) or attracting and engaging a private equity company to buy part or all of the business.
While any transition includes an adjustment period, this one may be the most difficult for some. Once an owner hands over a portion of their company to investors, the day-to-day operations may look very different.
A transition away from sole ownership will likely mean joint control over business strategy and decisions, so it’s imperative to conduct thorough conversations ahead of time to ensure the owner finds the right partner. Whether it’s existing employees or a new investor, this should include someone with similar business goals and objectives, and ideally one who has a complementary management and leadership style. Establishing and documenting clear roles and business plans and expectations should also help minimize future issues and friction.
Your financial partner can help you plot out how to financially prepare and transition the business for optimal success. Your financial partner can help explain what an ESOP can accomplish for your business, discuss ways to grow the business faster, and outline long-term strategies for remaining involved in the company or exiting the business operation entirely. This planning should also include determining your ideal exit or retirement timing as well as the income you would like to secure for your next phase in life.
3. Legacy planning
This is the most traditional business succession plan and focuses on benefitting you, your company’s long-term health, and your loved ones. This scenario centers on providing both financial security for family members and fulfilling the owner’s vision for the company.
It is critically important to speak with your business and personal financial advisors well in advance of any transition to ensure your income and family are taken care of, but this one will have additional considerations as well.
First, your financial team can help analyze business performance and the company’s cash flow to create the appropriate balance between the assets needed for the company’s future success and your desired compensation, including the level that would trigger a succession plan.
They can also help you go through some of the tougher financial questions. From determining the amount of income you would like to provide for yourself and your family members, to ensuring your employees are financially cared for short- and long-term, your financial partners can help remove some of the emotion that naturally comes with these conversations and help you objectively plan for these needs.
This planning is critical in forming the basis for a successful succession plan that incorporates the long-term needs and performance of the company while also caring for personal and next generation financial security.
As we all know, each company and owner are unique, and each will have specific considerations that must be contemplated. These are merely a few of the situations we’re currently seeing. The main point is that if you decide that pursuing a business transition is right for you and your company, it’s important to work with your trusted advisors, including your financial partner, so you can establish and implement an informed plan to navigate a smooth and successful transition.
If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.