Tips for Successful Business Succession Planning

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Whether you are looking to exit from your small business in 5, 15, or even 30 years from now, it is never too early to start thinking about your eventual retirement from and sale of your business.  Selling your business or transitioning the business to a new generation takes planning. Following are some helpful tips for successful business succession planning:

  1. Hire a Business Attorney:  Hiring a qualified business attorney early on will help you to understand the business succession process and the many options that may be available to you.  A business lawyer will also help you understand whether you want to sell the company to insiders/key employees or to outside third-party buyers.
  2. There May Be Multiple Ways to Exit the Company.  Depending on your situation, you may be able to exit in any number of ways:
  • Stock Sale/Membership Unit Sale: Sell the ownership of the company to one or more persons in increments or all at once.  This sale of stock can be to a key employee, a co-owner, or to an outsider;
  • Stock Redemption/Unit Redemption: If you have other co-owners who will continue to own and run the company, consider whether the company could buy you out over time or in one lump payment by purchasing or “redeeming” your stock.  
  • Asset Purchase:  Also very common, is when a third-party buyer wants to set up their own company – a clean slate – and simply pick and choose the assets of your company which they wish to buy (i.e. equipment, inventory, customer lists, etc.).  This is called an Asset Sale or Asset Purchase.
  • Inheritance/Heir:  If family is involved in the Company and is prepared to run the Company after you retire or pass away, you may simply wish to leave your ownership interest to them when you die.  
  • Dissolution: If there is no buyer or your company has very little value, perhaps you would consider liquidating the company, settling any debts, and then dissolving the company.

3. Avoid Seller Financing or Payment Over Time:  If possible, a business owner should avoid providing seller financing to a buyer – that is, avoid lending the money that will be used to purchase your business.  You never know what the future will hold – the business could decline after you leave, the buyer could pass away, the business could be sued.  These or other significant events could result in you never getting paid in full for your business.  Identifying strong buyers who can qualify for bank financing or have the assets to purchase the business outright, is an important step in business succession planning.    

4. Have an Open Mind: Sometimes even the best laid succession plans fail and a backup plan is required.  Perhaps the key employee who you thought was going to take over the business decides to leave the company.  Perhaps a potential deal or financing falls through during negotiations.  Whatever the circumstances, know that there are options available to you that you may not have considered.

Contact a business lawyer at Walden, Neitzke & Kuhary, S.C. today to discuss business succession planning or any other business needs.