By Jerry Butler, MBA, CFP, CIM, FCSI President, Queenston Group
Many years ago, baby boomers went into business to make a good living and to manufacture, distribute, and/or sell a product in which they were interested in, and that they believed could help their customers. Building value in their business and selling it was not a consideration at the time. Today, most baby boomers in business now have an asset this is valued at over 50% of their net worth.
Succession planning does not mean Exit. It is a plan to both protect and increase the value of your business, and to begin the process of maximizing the selling price.
Protect You and Your Family
A distressed sale is going to derive the lowest selling price compared to any other situation. We all know that. What planning do you have in place to protect the value of your business in the short and long term, in the event of an unforeseen event?
Uncertainty by your clients, due to your disability or death, will result in clients finding an alternative – in a hurry. In addition, without the prospect of a proper transition – the value of your business is going to be worth a lot less compared to when there is proper planning in place. If there is no formal valuation or continuation plan in place, your family may take the first offer that comes through the door.
It is ironic that financial planners talk to people all day long about retirement planning but do not have a solid exit strategy in place for themselves. Wouldn’t it be more proactive and efficient to have a plan in place now to double your business’ value in 5 years, knowing that you want to retire in 5 years, rather than waiting until year 4.5 to take action?
Tax and Legal Planning
This is very important – it can save tens of thousands in income tax and professional bills in the future, or in the case of an unforeseen event. The best corporate structure, clean balance sheet, legal contingencies, wills and personal assets, etc. should be addressed sooner rather than later.
Most small businesses’ success is the result of one person. The problem is when the value is wrapped around the owner’s presence. If the owner is not there to select, negotiate with, and train a successor, much of the value can be lost. It is important to have a succession plan in place to minimize the lost value and/or income from the business in the case of an unforeseen event. Even short term disability can result in a loss of income and/or value.
When to Start Your Succession Plan
What is that saying about planning? – “the best time to do planning was in the past; the second best time is now!”
It is a very important segment of Succession Planning to have many “what if” Exit Strategies. There are two basic scenarios to exit your business:
- When you have planned to i.e. the perfect scenario – right time and right price; and
- Every other time! This could be from death, disability, family issues, financial, etc. The main reason to have a Succession Plan is to protect your assets in case you or your family HAS to sell.
Succession Planning is similar to buying insurance – you do it for the unexpected events in your world not for the perfect scenario.
For more information, visit http://queenston.net/