Farmers often have a great deal of wealth tied-up up in their business. It follows logically, then, that the most important step a business owner can take to protect that wealth they created for their family is to prepare their exit strategy far in advance of their anticipated exit date.
According to surveys by the Exit Planning Institute, 75% of business owners express regret one year after exiting their business. While there are many reasons for post-exit regret, these reasons often stem from one common cause: Business owners are not engaging in early-stage exit planning. Failure to plan early prevents them from thinking through how plans may go awry and take specific actions to ensure a successful exit. And family transitions only add more complications that need special attention, creating a greater need for early-stage exit planning.
For many business owners, exiting their business is an unpleasant idea, and burying their head in day-to-day operations is a convenient distraction. But life is full of surprises and an exit can occur much sooner than expected. Having a well-thought-out exit plan is essential to attaining the best outcome, while procrastination is the poison in all exit plans.
That Essential First Step
The first step the business owner must take is to start preparing their business as if they were going to sell it, even with family succession in mind. This process is best performed with the assistance of an exit planning professional, who will examine the business in detail, provide a value-range assessment, and create a detailed plan of action to optimize value and attain the highest sales price. Preparing the business for sale results in the owner developing the processes, systems and documentation necessary for a third-party buyer to step in and continue to run the business seamlessly, without the seller’s involvement. This is a vital for family succession plans because it provides the heirs with the greatest chance to of success. The best run companies — the most valuable business — are the ones that can run smoothly without the owner.
Ask Yourself the Right Questions
Owners need to think carefully about what they want to accomplish when deciding on the outcomes of their exit. There are essential questions the business owner needs to ask themselves, including:
· Will you hand the business over to your children?
· Do your children have sufficient skills to run the business?
· Do your children want to take over the business?
· What if key employees are more qualified to run the business than your heirs?
· Will you implement a training plan for your heirs?
· Will you develop incentives for key employees to stay and work for your heirs, instead of allowing resentment to cause them to abandon ship?
· Will key employees want to buy the business?
· Have you identified preferred third-party buyers, should the need to sell the business arise unexpectedly?
Early-stage exit planning includes open conversation about succession plans with all the stakeholders (family, key employees, advisors). This may lead to uncomfortable conversations, but it will also allow the owner to determine the most feasible and effective plan, and forestall potential conflicts arising among stakeholders after the owner exits from the business.
Conflict among heirs is the last thing an owner wants to occur after exiting the business. Unfortunately, there are numerous ways conflict can manifest. For instance: If the owner has more than one child, do they split the business evenly among the heirs? What if only one heir is an active participant in the operations? Heirs who actively work in the business may feel that their participation in the business gives them greater rights to ownership and profits. Heirs who do not participate in the business may feel that an equal share is their birthright. Resolving these potential conflicts should take place long before the owner exits from the business, and not be left for the heirs to resolve among themselves after the ownership transition takes place.
The Essential Question
Founders will often anticipate their heirs taking over their business as soon as they have children. It is a common and normal phenomenon. However, business owners must objectively assess their children’s ability to continue the run the business successfully, and ask themselves these questions:
· Do I want my heirs to inherit the business itself?
· Or do I want my heirs to inherit the wealth that I created in the business?
If your heirs are qualified to run the business without you, then pursing that succession plan may be your best option. Alternatively, if the children lack the skills or motivation to run the business, you should consider that a sale to employees or to a third party may be your best option. You can then transfer the wealth you created with your business to a diversified portfolio of assets, which can be professionally managed for the benefit of your heirs. There is no intrinsically right or wrong path here: The point is to make certain that you have carefully vetted the exit plan regardless which path you pursue, and that you have an equally vetted contingency plan.
What No One Tells You About Exit Planning
Surprisingly, the topic that gives owners the most difficulty in exiting their business is what they plan to do with their life after they have exited the business. Depression or melancholy in the first year after exiting the business is not uncommon. What will motivate you to get out of bed without a business to go run? After years of building the business, what will be your creative outlet? Did your social life revolve around a business you no longer own? Think about it this way: If you exit your business at age 60, and you live to age 95 (not uncommon), what is going to fulfill your sense of purpose for the next 35 years? Developing and testing your post-exit life plan while you still own your business is an essential step in exit planning.
The Time to Plan Is Now
Regardless of when or how the owner plans to exit their business, succession planning should start very early. Transitions without carefully developed plans can go horribly awry. Have a thoroughly vetted plan for the most desirable outcome in place — and have equally vetted alternative plans. And of course, make sure you include a professional exit planning professional in the process to ensure you remain objective and thorough in developing the most effective exit plan possible. — By Rich Gunn, CEPA
Rich Gunn is a Certified Exit Planning Advisor (CEPA) and a Partner in the Advisory practice at BPM, one of 50 largest accounting and advisory firms in the country. His newsletter, the Business Owners Special Series (B.O.S.S.), is distributed monthly and serves as the basis for his recently published e-book, Value-Focused Business Planning.