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Wednesday, October 30, 2019

Business Succession Planning is a Process, Not an Event

Starting and building a successful business can be a very rewarding vocation.  The satisfaction that comes from overcoming obstacles that establish the right business culture, with the right people, and a quality brand name cannot be fully appreciated unless you have done it. But even successful entrepreneurs often fail to consider their exit plan even as they build and grow their enterprise.

The fact is, if you own a business, some day you will no longer be part of your business.  You will exit your business in one of four ways:

  • Transfer on death to heirs
  • Sale to a third party
  • Internal sale to key employees
  • Liquidation

Each of these options are a process, not an event. Consequently, current business development decisions should be purposefully made with an eye toward your exit strategy.  Let’s explore each option and the issues that must be resolved to accomplish each strategy.

Transfer to Heirs

If your plan is to pass your business to your heirs at your death, consider the following issues:

  • Do the heirs have the aptitude and interest to run the business?
  • Have the heirs been properly trained and groomed to take over leadership?
  • Will there be estate taxes incurred when the business is transferred at your death? How will those taxes be managed and paid?
  • Can the heirs successfully work together? Should one person have the controlling interest?
  • Will the business become a point of conflict among family members?
  • Has the succession plan been communicated to employees and family members so that there are no surprises?

Sale to Third Parties

The following issues require planning when you consider a third-party sale of your business:

  • What is your business worth? Has it been valued by a qualified business broker or appraiser? Is the price realistic or imaginary? Are you satisfied with the price?
  • Who are the potential buyers for your business?
  • How will the sale be financed? Will you receive payments over time, or would a bank be willing to lend money to the new owner?
  • Has a CPA or tax attorney evaluated the tax consequences of the sale?
  • Are the books and financial statements clean and clear? Do you finance excessive personal expenses from your business that reduce the perceived value of the business?
  • Are there any major lawsuits or business liabilities that would deter buyers?
  • Are you selling an enterprise that generates a cash flow, or are you selling your job to someone else?

Internal Sale to Key Employees

Sales to key employees can be a good option if you can resolve these issues:

  • Have you identified the key employees who can run your business? Do the employees want to own and operate the business?
  • Have the key employees been trained and groomed to be business managers and leaders?
  • Has your plan been clearly communicated to the key employees, non-key employees and important customers?
  • Can the business operate without you? Have you made yourself operationally irrelevant?
  • How will the employees finance the purchase? Can they get bank financing, or will the buyers have to pay you from future business profits? Are you willing to take the risk that the business fails under the new ownership and payments are not made to you?
  • Have the tax consequences of the sale been evaluated by a CPA or tax attorney?

Liquidation

Liquidation may be the easiest option, but it might also be the least financially rewarding.  Consider these issues: 

  • Is the business worth more as an operating entity or in liquidation?
  • How long will it take and what will it cost to liquidate and wind up operations?
  • What are the income tax consequences of liquidating?
  • Will you feel satisfied?

As you can see, each of these exit strategies presents its own challenges and planning requirements.  It might take a number of years to streamline operations, identify potential buyers, groom and train successors, make yourself operationally irrelevant and build a valuable stream of income that someone wants to purchase.

If it is time that you refocus your business planning efforts on business succession, we recommend that you talk with your business attorney, your estate planning attorney, a CPA, and perhaps a business coach to assist you in the transition process.

By Richard H. Foley, Jr.


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