Business succession planning is simply creating a plan, in advance, of how a business owner wants his or her business to be operated after the owner’s death, disability or retirement. It is somewhat like making a Will, but for your business. While many think this term is limited to family succession planning, it also includes formulating a plan to transition the business to one or more key employees.

The starting point for successful business succession planning is valuing the business. In many cases, the business owner has no idea of the business’ value or will have either undervalued it or overvalued it. While business valuation is not an exact science, we work with experienced professionals who can provide a detailed valuation report to guide the business owner in our succession planning. Ultimately, the valuation decision will be the business owner’s to make.

Once a value has been established, we then begin a strategy for deciding how best to maximize that value for the benefit of the business owner and his/her family. The owner may decide that there are no family members or key employees to whom the business could be transferred or sold and that the business should be sold to a third party as soon as possible. Alternatively, if the business owner has identified one or more family members or key employees who could successfully continue to operate and manage the business after the owner’s death, disability or retirement, then a business succession plan can be put into place.

Such a business succession plan can take many forms. While most younger generation successors will not have the capital to pay the business owner cash for the business, a structured buy-out is typically put in place with the seller holding a note and multiple layers of security for the business owner or his/her estate. While life insurance, disability buy-out insurance and/or bank loans may be part of this planned buy-out, insurance is not always available or practical and will not be in play if a sale is bought by retirement. Likewise, if there is not adequate collateral, a bank loan may not be available or may only provide part of the funds for a buy-out. Therefore, the business owner, in essence, becomes the bank and moves from the position of owner to creditor.

The final layer in successful business succession planning is for the business owner to set the successor or successors up for success. The business owner must honestly assess who can operate and manage the business after the owner is gone. If the owner has three children who all work in the business, but only one has the business acumen to run the business, then a plan should be fashioned with this goal in mind. The other two children can be treated “equally” from a financial standpoint, but if the business is not run properly the family may not ultimately realize the value of its largest asset.

We discuss all these elements with our clients in developing a business succession plan and encourage all of our clients to create such a plan. As mentioned above, a client’s business is frequently the largest asset in their net worth, and figuring out how to turn that asset into cash is a key to providing for the business owner’s family.