Preparing for a Business Transition

Determining value is a central question for a business owner considering the sale or transition of the business. A key element that drives company value is earnings. However, Todd Craft and Tim Muehler, both with Clifton, Larson, Allen, LP, note that the quality of the earnings is the key. A prudent buyer is going to look behind the numbers and determine how the earnings are being generated. Muehler says quality earnings are:

  1. Operational in nature and easily replicated by a buyer;
  2. Diversified and thus less susceptible to risk; and
  3. Capable of significant growth.

Today, most mature, closely-held businesses are owned by Baby Boomers, which means that many will transition over the next few years. The businesses will be sold to key insiders, outside third parties or transferred to family members. In any case, necessary planning must take place in order to insure a smooth and successful transition.

The planning process typically involves more than just the business owner. Instead, the business owner will assemble a team of advisors to assist. Potential team members for consideration include:

  1. Attorney
  2. CPA
  3. Qualified Business Valuator
  4. Banker
  5. Trust Officer
  6. Insurance Professional

Some of the team members may wear more than one hat. However, each brings a different perspective and talent to the planning process.

The steps for developing any given business transition plan may vary but there are a number of common steps. A range of values should be established for the business. Existing corporate or limited liability record books, along with estate and succession planning documents, should be reviewed.

A family meeting should be held to determine goals, interests, feelings about other family members, and the roles of family members in the business. Various family goals should be discussed which may include: (a) retaining control by the existing owner; (b) retaining income to continue the lifestyle of the owner and his or her family; (c) satisfying the family’s estate planning objectives; (d) providing for continuity of the business; and (e) reducing transfer and income taxes along with administration expenses.

Various exit strategies need to be reviewed such as asset sale, stock sale, sale to ESOP, sale to employee, sale to family member(s), sale to grantor trusts, lifetime gifts to family members, gift or sale to family members at death. Consideration must be given to the cash needs of the business during the implementation of any plan. The plan, once in place, is typically implemented over time. Thus, it should be reviewed and tweaked periodically.

All of the above takes time, first planning to determine goals, then action steps to reach the goals. It is not unusual to have the entire process take one to three years. There is no time like the present to start.

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