By Greg Hart, CFP®
If you’re a business owner, your job is more than just a career—it’s your life. The blood, sweat, and tears it takes to travel the road from that first spark of a creative idea to the managing of a full-fledged business is not for the faint of heart. And because starting and running a business is all-encompassing, it’s unlikely your few spare moments are spent thinking about how and when you’ll transition out of this ownership role in the future. But after all the years of hard work that go into building a successful and sustainable business, it’s inevitable that one day you’ll face decisions surrounding the final transition of your company.
Every single business owner will one day transition their business at some point, which means advanced planning is critical to achieve their goals—both for their business and family. Unfortunately, less than 25% of business owners have established a formal written business succession plan. (1) Too often, business owners just “wing it” and they miss many planning opportunities to put themselves in a tax-favored position prior to making a move.
This failure to plan is often due to two reasons: first, business owners are much better working in their business than on their business—as they should be; second, the process of creating a proper succession plan can be difficult and overwhelming. This is where professionals can greatly assist owners by illustrating and implementing a clear and concise process from beginning to end.
Here’s a glance at what we, at Haddon Wealth Management, will cover in our stage-by-stage process.
Stage One: Initial Discovery Meeting
Defining exit objectives and goals:
- What is your desired departure date?
- What are your income/financial security requirements?
- What exit routes are open to you?
Stage Two: Information Gathering
Personal financial analysis:
- Review existing financial, estate, and business plans.
- Determine gaps in each of these plans, if any.
- Discuss wants and needs.
Stage Three: Determination of Business Value
Current valuation and the development of value drivers:
- Analyze each exit route to determine how to protect and increase business value and understand the tax implications of ownership transfer through sale, gift, and estate.
- Obtain a formal valuation performed by an independent third party to set a fair price for company stock based on a consistent methodology for valuing the stock in the future. Include a reasonable discount for lack of marketability and minority interest, if applicable. This provides a benchmark for buy–sell agreements and executive compensation, equity-based plans, etc.
Stage Four: Choosing an Exit/Transition Route
- Sell to an outside third party (financial or strategic buyer).
- Sell to employees using an Employee Stock Ownership Plan (ESOP)*.
- Sell the business to one or more key employees (management buyout).
- Sell to remaining shareholders.
- Transfer the company to family member(s).
- Retain ownership but become a passive owner.
Stage Five: Implementation of Chosen Business Exit Route and Post-Transaction Servicing
- Engage shareholders and the company to execute the chosen business exit route (external or internal sale or transfer).
- Develop a contingency plan for the business (define key succession management, and be able to answer who will run the business in the event of a death or disability of current operational shareholders).
- Develop a contingency plan for the owner’s family (financial, estate, and charitable planning).
- Develop an ongoing servicing plan for the business and family (ongoing review to ensure that planning is being followed and to advise in the event of life changes within the family or succession management).
We’re Here to Help
A range of emotions will undoubtedly accompany the transition of your business and relinquishing the reins. As with any important business decision (and especially when it’s emotional), it’s wise to partner with a financial professional who can serve as an objective and knowledgeable third party. Having worked through these issues with our clients, we at Haddon Wealth Management stand ready to help you navigate these emotional decisions, the transition, and whatever comes next. Call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting. We look forward to hearing from you soon!
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.