The Business Transition Planning Process
Updated: May 9, 2020
For many families, their largest asset is typically their home, or some form of real estate. It is not uncommon that at some point in time this asset gets sold and the proceeds are invested to provide an income to cover costs associated with new living arrangements. In a similar manner, families that run a business must also face the eventual “sale” or transition of their business.
The transition of a business is not quite as simple as the sale of real estate. There are a number of additional factors that must be considered. There is the obvious replacement of income, taxation of the proceeds, valuation of the business, what happens to the employees, etc.
However, the most important factors are the who, what, where and when. Who is the business going to transition to? What value will be assigned to the business? Where will you source the buyer from? When does the transition take place?
The term ‘Business Succession Planning’ relates to the overall planning process that results in the most efficient and effective transition of a business from one owner or ownership group to another. The single largest mistake business owners make is failing to plan for the transition of their business. Failing to do so can be both costly and stressful on those left to pick up the pieces.
Factors to Consider Who: Is it a group or individual inside the family/business or is it some unknown from outside the family/business? This will affect how the business is positioned for sale, training of a replacement for yourself, the importance of a proper management culture and the terms of payment.
What: Is the business currently positioned for the sale price required to meet your goals? Do the numbers support your valuation of the business? Do you want a lump sum payment or will you receive payment over a period of time? What role will you play after the sale of the business? Most businesses fail to sell due to over-valuation by the current owner.
Where: Most business owners assume that there is always someone who wants to buy their company. Unfortunately this is often not the case. It is important to understand the potential market for the sale of your business and position it appropriately. This should occur well in advance of the expected sale date.
When: Will the sale of your business be the result of a controllable or uncontrollable circumstance? Controllable simply refers to a planned retirement. This allows for ample time to properly plan and prepare for the transition of your business. But what about the uncontrollables such as debilitating illness, sudden death, bankruptcy or financial stress, family breakdown and divorce. It is never too early to start planning.
This brings us to the How.
A successful business transition can take up to 5 years of planning to efficiently and effectively implement. Working with experts and professionals is a must.
For more information on how Northland Wealth Management can assist you in the future transition of your business, please contact our office.