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Options for Business Succession Planning

| April 26, 2021

Whether it is now or in the future, 100% of business owners will move on from their business at some point. Regardless of this fact, very few business owners take the time to develop a succession plan. If you are a business owner, it is essential to plan to get the greatest value for your business.

The most significant decision to make upfront is to determine your objectives and ensure that income is available upon exiting the business. Here are some key considerations surrounding succession planning for mid-market companies.

Third Party Sale

If ownership's goal is to receive top dollar, business owners typically consider a third-party sale. A company can be sold to a competitor through a strategic sales process, become a strategic acquisition of a larger entity, or potentially targeted by a private equity firm. The more strategic acquisition – the more an acquirer would be willing to pay vs. traditional valuation metrics.

As a result of this type of transaction, the business will likely be sold to a professional organization with deep pockets, perhaps benefit from a competitive sales process, and typically receive its best offer from a dollar perspective. A significant portion of the sale will likely come in the form of an earn-out. The owner group will have to get comfortable with the idea of “working for” someone in the company they built for at least a couple of years in most instances.

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Inside Transfer

The other approach to consider an inside transfer. This approach is most effective when the business has the luxury of time. Although it can vary, five years is the typical runway needed to execute this properly.

An insider transfer would often make the most sense when your objective is to sell the business to a family member, a key employee, or would prefer to consider an ESOP (employee stock ownership plan). There are many tax advantages to these types of strategies – as you are benefiting from strategies like minority discounts, gifting, and the tax advantages potentially related to installment payments and annuity income streams rather than lump sums. However, with the increased time needed to execute the transfer – there comes increased risk. With time, many things can happen in the world and in people’s lives that might otherwise derail a good plan. A successful insider transfer can accomplish many potential intangible goals. It can ensure that the company’s values are maintained and ensure that the employees still have jobs every day, benefitting its local presence.

Key Considerations

Our biggest recommendation would be, to begin with, the end in mind. Execute a personal wealth analysis and financial plan to determine if there are any weak points and concerns. Determine any lifestyle expectations and legacy goals. What portion of the nest egg will be needed to support the intended lifestyle safely? Work with your CPA to determine that post-tax, the sale objective satisfies these needs and wants. Then, contemplate the idea of an inside sale vs. third-party sale. Do you have an immediate preference? Do you need to evaluate various routes? Begin a process of accomplishing this due diligence and set a deadline for yourself. Keep this information confidential. Consider working with a Certified Exit Planner or other exit planning specialist to create a written game plan that unifies your deal team (CPA, CFO, attorneys, wealth managers, key family members).

From there, just like the business plan you likely put in place to start and grow your business, it is essential to stick to your timeline, maintain confidentiality, and execute to maximize value and maintain efficiency.

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Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and  should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. 

Chris Kampitsis is a registered representative of and offer securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC.   6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000