By Maurie Cashman
Setting ownership transition objectives are the key to any ownership transition plan.
“When a man does not know which harbor he is heading for, no wind is the right wind.” So said Seneca almost 2,000 years ago.
Today, speaking to business owners he might likely say, “Ownership Transition Planning for business owners must start with knowing your ownership transition goals and objectives; otherwise, failure may be inevitable.”
Why is Seneca’s counsel so true today? In this first and most indispensable ownership transition planning, owners form their goals and objectives. But what should an ownerâ€™s objectives be and why is it so critical to fix them before moving forward with ownership transition planning?
I recently met with Mike, the owner of a 45-employee advertising agency. He had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. After years of procrastination, at age 58, he was finally ready to retire.
“Mike, it’s good that you’ve decided on two of the critical ownership transition objectives all business owners must answer. You’ve determined how much longer you want to work in the business. It seems you want to leave sooner rather than later. And second, you have decided to whom you wish to transfer the business, in your case your son and a key employee. But you still need to determine a third, critical, ownership transition objective, how much money do you want or need when you leave the business? Does that money need to be in cash or would you accept a promissory note?”
The key issue here is that Mike was a victim of his own success. By putting off planning for the transition of ownership, Mikeâ€™s business had outgrown what his objectives. Like many owners, Mike had two choices. First, he could retire now and sell the company for cash â€” but not to his son and key employee. They had no cash and no bank would lend an amount even close to the amount of money necessary to close the deal. If Mike wanted to sell now and achieve financial goals, he would have to sell to an outside third party with sufficient cash. His alternative was to sell the company to his son and key employee â€” knowing he would have to wait six to ten years to receive the entire purchase price.
Mike’s situation illustrates why setting consistent and achievable objectives early in the ownership transition planning process is so critical.
The three principal objectives common to nearly all business owners (and the questions that must be answered in setting these objectives) are:
- Leaving the business financially stable. How much income will you need for the rest of your life after you leave the business? Think of financial stability as a flow of after-tax income, adjusted for inflation. Do you want to receive cash when you leave the business or are you willing to receive the purchase price over time? Or can there be a combination of the two that will meet your objectives?
- Transferring the business to a particular person. To whom do you want to transfer the business? To a child? Key employee? Co-owner? Or perhaps to an outside party who can pay top dollar for the company? Are these options viable and are you preparing them both to manage the business and to be able financially to purchase the business in the future
- Leaving the business when you want to. How much longer do you want to remain active in the business?
If you don’t answer these questions and thereby set your basic ownership transition objectives, you may end up like Mike. He was left without a means to transition ownership of his business on his terms because he wanted to transfer the business to a key employee and he wanted cash.
If you prefer to transfer of your business on your terms you must formulate specific, consistent, attainable goals and objectives. Your ownership transition objectives are the foundation for all subsequent planning, or in Seneca’s words, “the harbor you must head for.”
Many owners may not reach their objectives. Why? Because they may not have a plan to achieve them. They may be too hurried, too focused on their businesses, and they may not know how to go about planning. Many owners understandably lack ownership transition planning experience â€” they may not even know where to start. We suggest you begin your ownership transition planning process by working with experienced advisors.
Financial and insurance advisors often have the software and experience necessary to help you determine your financial needs based on your current net worth. However, it will take a team of advisors to help you in setting ownership transition objectives and formulating a plan that will achieve those objectives, including your financial needs.