The truth of the matter is, every small business owner will eventually transition from the business. While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.
Whether you love your work so much that, in a manner of speaking, you’d be happy to die at your desk, or you’d like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit. And planning ahead has significant benefits.
There are three major objectives that a business owner should consider prior to reaching the point where they must exit the business.
Timing of your exit – When do you want to leave?
Financial needs after exit – how will you support the post-exit lifestyle you desire?
Who's going to take care of your baby and run the business when you're not there?
1. When do you want to leave the business? Unless you want to die at the desk, you’ll want to consider at what point you desire to make the transition. Pick a time frame and begin considering the implications of that time frame. When do you back out of the day-to-day operations? How long do you take to do this...years or months? Can I effectively transfer the company to whom I wish to transfer it within that period of time? How long will it take to train my successor or children to be owners? Will I be able to realize my financial goals within that time frame? Will market conditions lend toward a successful sale to a third party? The time frame you decide on is a key driver. And, it's essential to establish at least a target date, or you could end up on the perpetual "I'm going to leave in around five years..." merry-go-round.
2. What income do you need? Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself. However, The large majority of owners require some type of income either from the business at the sale or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity. As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.
3. Who's going to watch over your company? Hopefully, you have enjoyed working in your business and there is a sense of giving up "your baby" to someone else. The choice of a successor is a significant, and often emotional decision. There's the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company. Several options exist, from passing the business on to two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program. So significant factors come into play here - the most critical being who actually has the skills, knowledge, and temperament to own and run the company as well as you have.
Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business, and children not in the business are all very significant. It's often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family. Planning ahead enables conversations to be had so everyone's expectations are clearly understood prior to the day when the transition actually occurs.
