Chicago Business Succession Planning: More than a Quick Sale
There are about 27 million small businesses in the United States. That’s a lot. And many of these businesses are owned by those in the baby boomer generation (80% if you believe what Inc. Magazine says). Whatever the exact number may be, there are many business owners out there ready to cash out on a life of hard work for the sunny beaches of Del Boca Vista. But how is this best and most wisely done?
There are plenty of great business brokers who can list a business for sale, help to spruce it up, and offload it in a quickie transaction. In most cases, though, this is either not possible or not the best way to wring the most out of the owner’s life’s work. Why not?
First, there is something of an unknown for a buyer in purchasing a business, and as a result, the business owner will have to take a haircut from a risk discount perspective (“He knows how to run the business, but I might fall flat on my face.”) Another consideration: goodwill…that intangible feel good stuff like brand loyalty, marketing presence and personal relationships that gives a business extra value. If the owner leaves, he very well might take all of that goodwill with him down to Florida.
So in most cases, what’s the best way to get as much as possible from an ownership transition? Business Succession Planning.
Business succession planning is a buzzword gaining more and more notoriety nowadays…what is it? In metaphorical terms, it is the process of the owner gradually wriggling her way out of the business as opposed to a sale, which is more akin being shot out of a cannon.
Business succession planning is a process first and foremost. The business owner takes a long, hard look at his business and all of the moving pieces. He identifies his goals with respect to retirement and unwinding from the business. He determines how best to achieve those goals. With the help of attorneys, accountants and consultants the business owner determines the best plan for unwinding from the business while leaving it as a going concern.
Here’s an example:
John Doe (real creative name, I know) has spent the last 35 years building his local health club business. He has three gyms in the same metro area, all of which are financially healthy. John wants to unwind from the business, but wants to stay involved in some small manner at his leisure. If John sells outright, he’ll probably leave money on the table and won’t have a role in the future of the business. John also wants to keep the business in his family and pass it down to his two sons who have no business sense, but have helped him run the health clubs for the last 15 years.
In terms of succession planning, we might offer some of the following suggestions to John:
- First, John needs to identify the next leader. It might be John’s sons, or just one of them. It may also be someone else that works for the business. Perhaps an outsider needs to be brought in. This should be a person that can run the business on a day-to-day basis when John is swimming with the Dolphins in Florida.
- Next, John needs to arrange a compensation/ownership package that will incentivize the next leader or heir apparent to stay loyal to the business and put the needed time and effort into it.
- John needs to scope out his role in the business, and how he plans to disengage. Will he be a consultant? A macro “80,000 feet” leader?
- John needs to execute this plan by coordinating business and estate planning issues so that everything fits together as it should.
Business succession planning is a process that requires time, money and attention. But a lifetime of building and growing a business deserves that at least.
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