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Succession Planning For Small Businesses
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Article 3: Start With An Exit Plan
Succession planning starts with formulating your exit plan from the business.
An exit plan is a long-range strategic plan for how you will hand over the reins of your business when the time comes — whether this is via sale to employees or a third party or transfer of a family business to your heirs.
“Exit planning helps you create higher value for your business, as well as legal and tax structures to lower your income tax liability,” says David Geller, principal of GV Financial Advisors in Atlanta, Ga., a financial planning firm that specializes in working with private and family business owners. “It also enables you to objectively consider the various options available to you for exiting the business well in advance of your anticipated departure from the company.”
Geller outlines the following five-step process for creating a business exit plan:
1. Establish your objectives. Be prepared to answer these main questions.
- When do you think you’ll be ready to leave the business?
- How much money will you need to realize from the sale of the business?
- Whom might you want to sell the business to?
“Without answering these basic questions,” says Geller, “it is impossible to plan.”
2. Determine what you have. Most owners don’t have a realistic idea of what their business is really worth. While the value of the business will obviously change over time, you should obtain a professional business valuation as the time for exiting the business draws near.
3. Promote the business’ value. What features of your business contribute the most to making it valuable? For example, are all legal documents and contracts in good standing? Are financial controls in place and well documented?
“These ‘value drivers’ can reduce a buyer’s risk in purchasing your business and enhance the prospects that it will grow significantly in the future,” says Geller.
4. Decide whom you hope to sell to. In short, you can sell your business to insiders or outsiders. Insiders would include current employees and/or management (via an ESOP or management buyout) or family members. Outsiders would include investors (i.e., private equity or an initial public offering) and complementary or strategic buyers.
Determining this will help you decide whether the business should sell for its highest possible value or its lowest defensible value.
The reasons for selling to an outsider for the highest possible value are obvious, while the decision to sell to insiders for the lowest defensible value will impact the taxes you and the insider(s) would pay, as well as whether both of you reach your financial goals.
5. Rely on a great advisory team. This is critical to keeping the IRS from taking a significant amount of the cash generated by the sale.
“In the end, this step must rank high on your priority list,” says Geller. “If you create a valuable business but lose much of it in income and estate taxes, what have you really accomplished?”
Your advisory team should be in place at the beginning of the process and should have extensive experience in all elements of exit planning, especially tax planning.
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