By Herschel Gornbein, M&T Bank
Are you a well-planned business owner? It’s not easy to think about transitioning your business while you’re still leading it and enjoying watching it grow, while staying focused on establishing and deepening customer relationships, banking relationships, and family relationships. But your current growth, borrowing, and cash flow management goals are all integrally connected to your future overall wealth management goals.
In fact, planning ahead is critical to your future success—and considering how much has gone into building your business into the prosperous, highly-regarded entity it is today, you owe it to yourself, your family, and your employees to position your business for its continued success, when you’re no longer at the helm.
Having a stress-tested, solid succession plan can help you reinforce the values that are important to you and your family. And starting to plan early can help provide better operational, financial, and tax outcomes and, ultimately, a more success transfer to the next generation of owners and managers.
Getting the most value from your business
Do you know what your business is worth? There are a lot of things in life you can’t put a price on. Your business isn’t one of them. In fact, the smartest business owners know that having a realistic, market-based value for your business is critical in helping you plan for the future, prepare for unforeseen events, and achieve financial and lifestyle goals for you and your family. But valuing a business accurately isn’t easy, and there’s no magic formula.
Business valuations can change over time, sometimes drastically. You can’t begin to truly plan or strategize until you learn about the process of valuation and its importance in helping you maximize the true value of your business.
Succession planning strategies
There are a few succession planning strategies that remain consistently popular with family business owners to identify and retain a willing buyer and fund the business during the transition, such as:
- Buy-sell agreements provide the legal documentation and financing to effectuate the sale of the business. The agreement is a legally binding contract that obligates one party to buy and another to sell some or all of a business when a triggering event—such as death, disability or retirement—occurs. In the case of an insured buy-sell agreement, the buyout is often funded with life insurance proceeds on the business owner’s life.
- Minority sale of ownership interests may be given or sold to family members in the business or to key employees to provide them with an incentive to stay in the business after the business owner retires or dies.
- “Key man” life insurance strategies on your life can be purchased to provide adequate funds to find a replacement manager or to retain key employees to run the business after the death of the business owner.
Until the ultimate succession is in effect, pre-sale liquidity planning and post-sale or transfer strategies (such as gifts and sales in trusts) must be developed, incentive and retention agreements structured, and the plan stress-tested with evolving “what if” scenarios.
Transitioning your business & leaving a legacy
Do you want to keep it in the family? Keep in mind the harsh reality that few family businesses survive the passing of the founder. According to the Family Firm Institute, only about 30% of family businesses survive into the second generation, 13% into the third generation and about 3% to the fourth or beyond.
On the upside, the parents most successful at passing the torch are the ones that have created a culture in which transition is expected, welcomed and encouraged. Additionally, they foster a culture of trust, communication, and transparency within their families. Start by asking these questions:
- Do your children have the drive and desire to lead your business? Weigh carefully their different strengths and weaknesses.
- How much experience in, and knowledge of, the business do you think is necessary and what decision-making and leadership styles do you prefer? You might need a management team for the business to succeed.
- What will be the size of each family member’s equity stake?
- Who will have voting and veto rights—and the right to fire?
Preparation is the key to success, so the time is now to begin thinking about how to perpetuate the continued growth you desire, the peaceful transition your family requires, and the legacy you envision.
Where should you begin? Your first step should be to reach out to your trusted investment, legal, estate planning, and tax advisors. As you move forward, what’s most important is that the advisors collaborate to ensure that the advice, guidance, and solutions for the next stage of your journey as a business owner are all working in concert, driving toward the fulfillment of your broad wealth management goals.
Herschel Gornbein is a Vice President in Dealer Commercial Services at M&T Bank with 25 years of industry experience. © 2016 M&T Bank. Member FDIC
Based in Albany, N.Y, he can be reached at 518-464-6138 or hgornbein@mtb.com.
