Most business owners – and their advisers – know that they should do some planning around what will happen to the business when they decide to step back from it.  As we get older and the time frame shortens, the sense of urgency may increase but often it is something that can be put off to another day. It is something that is not needed tomorrow, is it?

Consider the following, perhaps not your particular situation, but I am sure you can see some common elements:

In the beginning…

• Business succession planning doesn’t seem a priority (or indeed, relevant) when your first set up in business. Generally you don’t have a lot and you just want to get on with starting your business.
• Maybe you get some advice about business structures from your accountant but you don’t really know how it will go and you don’t have a lot of cash so you keep it simple and inexpensive.
• Over time you get busy, your business grows and you accumulate “stuff”.  Things are going well and you have more important things to do than worry about business structures and what happens to the business when you retire.

Time passes and one day…

• you decide you’ve had enough; or you die; or a business partner dies or has had enough or gets divorced or gets sick. All common stuff. You need to sell the business and:

(a) You negotiate a great price. You get paid. The tax office gives you a bill!

(b) You can’t get the price you want. The market price is markedly lower than what you think the business is worth.

• Your business partner makes a mistake and someone is injured or a customer loses money.  They sue your business and win.  Your partner, recently divorced, has nothing but his/her interest in the business which is now not worth much. You on the other hand have lots of “stuff”!  Who pays?
• Unexpectedly your businesses partner dies.  He/she personally own half of the business.  He/she has a will which leaves everything to his/her spouse and adult children.  What happens now?  What if you don’t have the funds to buy your late partner’s share out, or cannot agree to the price that they want or…horror of horrors, one of the adult children – who has never been involved in the business – decides that he/she wants to get involved because he/she thinks he/she can do great things with it!

You get the picture. Not a pretty one but all too common.

Why you shouldn’t put off planning for succession and exit

Every business owner will one day exit their business. The exit may be voluntary or involuntary but it will happen. There are two certainties in life: Death and Taxes. They alone are reasons enough to address business succession and exit planning if you want to:

• manage your business risk and preserve your wealth, and
• you want to know what will happen to your business (and your wealth and your family) if something happens to you and/or your partner.

As you have no say as to when that first certainty of life will occur, it is imperative that estate planning be undertaken as soon as possible, if you haven’t already done so.

There are essentially three stages in estate planning:

¨ Creation of the estate

¨ Preservation of the estate

¨ Distribution of the estate

This is not something that is done overnight — and one second post-mortem is too late.

What does “Business Succession and Exit Planning” involve?

In the corporate world, succession planning means ensuring there is a smooth transition of personnel for a business role ie having the right person to fill a position when it is vacated, whether voluntarily or involuntarily by the incumbent.

For a privately owned business, management succession is important  and indeed critical if it involves family within the business. However, succession and exit planning for the private business owner goes far beyond this.

Have you considered what your exit options for you as a business owner?

• Sale pursuant to a management buyout or buy in?
• Sale of the business as a going concern via trade sale or public listing?
• Pass on the business to family members or to other stakeholders?
• Merge the business with others?
• Close the business down and sell off assets?

What are the implications of the various exit options? What strategies do you have to put in place to achieve the desired outcome for your  post-business years?

Effective succession and exit planning involves addressing a vast number of complex issue —legal, tax., strategic planning to achieve the desired exit path etc. Further, as the process inevitably involves other people, particularly family and key stakeholders, it can become emotionally charged.

Addressing all these issues sounds messy and time consuming but it doesn’t have to be if approached in a methodical fashion with professional guidance and advice. Don’t put it off any longer.

Where do I start?

With the wide range of issues that must be addressed for sound succession and exit planning, it is clearly an area where getting good advice will greatly assist and ensure that when the plan needs to be actions, “what is meant to happen does happen”.

Seeking advice after you have given thought to key matters is highly recommended. You will  then be in a position to ask educated questions of your advisors and ensure that the strategies and plans developed with them are reflective of what you — and most likely, your family – actually want.

We have listed some questions that you should be asking yourself as the start point. [See Box on page 4] Try and work through them in order.

If they make you uncomfortable, that’s a good sign. They should. Don’t despair if the picture is not as rosy as you may have thought. At least you now have a better idea about the issues and can engage the right experts to draft agreements, wills, look after taxation issues, assist with retirement planning, estate planning etc.

How do I choose an advisor?

You should be aware that  the perspective of an advisor will influence how that advisor approaches the subject of business succession and exit planning; in particular:

• accountants tend to focus on taxation issues;
• business advisors may see it simply as an extension of a business plan or process improvement;
• business brokers and investment bankers may view it in terms of structuring a “transaction”;
• lawyers often see it in terms of legal agreements and structures around succession in a business; and
• too often, financial planners see it as putting insurance policies in place to fund a “buy/sell” agreement.

There is no one perspective that is more important than the other.

You need to be particularly wary of any “expert” who professes to know everything and tells you that you do not need to consult any other advisors. Whilst a key advisor  may be able to guide and a business owner through the process of succession and exit planning, including estate planning, it is likely that they will only do this effectively when they stick to the things they do best and co-ordinate and collaborate with other specialist professionals.

If you decide to co-ordinate the process yourself, make sure that the ‘right hand’ always knows what the ‘left hand’ is doing if you are to achieve a cohesive effective succession plan.

QUESTIONS FOR SUCCESSION & EXIT PLANNING ^{Note 1}: A Starting Point

The following questions are a good place to start. No adviser can answer these questions although some can help you work through them.

1. What are your personal goals around family, work, location etc?

a. Consider: You are now financially secure, you have enough money to take care of your needs now and into the future, how would you live your life?  What would you do?  What would you change?

b. Consider: You know definitely that you have 5-10 years left to live and that during these years you will always be healthy; what you don’t know is exactly when you will die.  What would you do with your life?  Would you change anything and if so what?

c. Consider: The doctor tells you that you have one day to live?  How do you feel?  Ask yourself: What would I do in the time left?  What do I wish I had finished or had been? What do I wish I had done? What did I miss?

2. Now consider what are the things that are stopping you achieving the things considered above?  How many of these are related to your business … really?

3. What are your financial goals?

4. Where does my business (really) fit into me being able to achieve my personal and financial goals?

5. What do I want to happen to my business:

a. If I die or can no longer work in it?

b. When I choose to retire?

c. Do I want my children etc to take over the business?  Do they want to?  Are they really capable or is someone else better to run it?

6. Right now, could the business be sold or handed on to a successor? If something happened to me, would the business fold or be sold for a song?

7. What needs to be done to make the business saleable?  If I were a buyer and it were offered to me:

a. Would I buy it?

b. What would I pay for it?  Really!

c. What could I do with it?

8. Would my family and/or business partner(s) answer these questions differently?

While the answers to these questions will not create either your estate or business succession plan, they will provide you with insights into what your personal goals are and where your business supports – or conflicts – with these.

It will also give you some sense around some of the issues which may currently need to be worked on in the business to improve your position and make succession possible.  It is a sound basis on which to find an adviser who can assist you to work through the process, work with other professionals, and ultimately assist you to develop and implement estate and business succession plans.

Note 1:  These questions have been adapted from work by the Kinder Institute.  See Kinder, GD and Galvan, SE “Lighting the Torch—The Kinder Method^TM of Life Planning”, FPA Press, Denver, Colorado, 2006

by Chris McGlinn