YOUR BUSINESS AUTHORITY
The average Springfield area business leader expects to exit their business in about nine years, according to the 2021 Economic Growth Survey results. As an owner, navigating your succession plan and, specifically, your sales strategy is a journey that requires a collaborative, team-based approached with a certified public accountant, attorney and certified financial planner.
According to this year’s Economic Growth Survey findings, the percentage of those looking to sell their business increased to 11% from 8% compared with 2020, and of those, 13% have the intent to pursue an external sale (down by 4 percentage points) and 14% intend to sell to their management team (up by 4 points). Selling to a family member remains stable at 7%. The largest segment of all, 18%, are unsure.
Before contemplating a sale, the first and most necessary step is a professional valuation by a qualified CPA. This valuation should become the basis upon which all business plans are developed. A proper valuation will help guide appropriate decision making and most critically help prevent undercapitalization. Your CFP can assist you in identifying a qualified valuation CPA.
If you’re already contemplating an outright business sale, the first step is contingency planning.
When there are other owners or employees who wish to purchase the business, seek out a team, including an attorney, to draft a buy-sell agreement and a financial professional to arrange funding mechanisms. This process allows them to purchase the business in the case of an unexpected event, such as death or incapacitation of the owner.
The next step of contingency planning involves retaining and mitigating the risks of losing key employees who are essential to a business. These individuals may be identified by the owner by asking, “If I lost Employee X, how would that impact my business?” If there would be a material detriment to your business in that scenario, they are a key employee.
Your team of a CPA, attorney and financial professional can help you develop a key employee retention plan. Common methods may include specialized deferred compensation plans and other bonus structures, all of which would be tied to legal agreements. Retention also can involve optimizing companywide employee benefits and retirement plans. Sometimes, it is as simple as making sure employees understand, utilize and appreciate the benefits they are offered. This is another area that your CFP can assist.
The premature death or incapacitation of these key employees also should be taken into account in the contingency plan. Mitigating the risk primarily involves consultation with the CFP on your team, who can identify methods of funding the business in this scenario.
It is important to note that all of these steps are just as critical when selling a business to a family member. Selling a business can be emotional, even when you don’t expect it to be. So, your succession planning team can help lessen making emotionally charged decisions with a little advanced planning.
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