Business Succession

“Business succession” are words, that when properly understood, leave many an able business person trembling in anticipation, and in many cases, in some level of denial. Many business owners prefer to avoid the issue of what will happen when they no longer wish to run their business for as long as possible. The problems of business succession are no less frightening, if the likely successor is a family member, or an employee, than when a third party completely unknown to the present owners must be found. When the goal is to pass the business within a family, it is important to know that national statistics tell us that only 34% of family businesses will successfully pass to the second generation, and an even lower percentage, 13%, will successfully pass to a third generation. Further, the tax issues which are raised in any business succession, become even more complex when family estate planning must be considered at the same time as business succession planning, and the complexity increases when business owners have some beneficiaries who will not succeed in the business, and some who will.

While issues abound in coming up with a thoughtful business succession strategy, there are certain fundamental rules that apply to every single transaction, and thus, are worthy of amplification here:

Allow Ample Preparation Time: A business cannot be successfully transferred to the next generation, nor sold to a new buyer, quickly and without careful planning. In addition to obvious training issues, the business often should be “prepared” for selling. Recently, at a seminar when several individuals who had sold their businesses were featured, all agreed that the last year that they were in business was as important and as difficult as the first year. Many businesses need a “sprucing up”, and perhaps a reorganization before they can be turned over. Sometimes, long neglected problems need to be resolved, and frequently, attention needs to be given to making the business as profitable as it can be (even if it means paying more taxes).

Develop a Thorough Sales Document: If you are going to sell the business to an outside party, or even to one of your own employees, a complete sales document including photographs, charts, financials, demographics, and everything else that is relative to the business should be prepared. A critical element of the sales presentation document, and one on which most business owners will need assistance, is a thoughtful valuation of what the business is worth.

Think about an “Ideal Buyer” and an “Ideal Transaction”: Think about it carefully, and identify at least mentally, an “Ideal Buyer” and an “Ideal Transaction”. Once you have identified the same, it will be easier to work towards these goals.

Use Professionals as Needed: This may seem self-serving, written by a professional who assists people in selling their businesses, or in transferring them to the next generation, but this is an area where very few people can proceed without the help of competent attorneys and accountants, and many times, business brokers. Do not be afraid to look to people who know how to transfer a business to assist you.

Make the Transaction Orderly: Last, but not least, make the transaction orderly. Follow a time line, use checklists, attend to all the details.

Thomas M. Wells, is the Senior Partner at WJ&L, LLP, and practices in the Business & Corporate, Real Estate, Land Use and Transactional areas.

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