As an owner begins looking at succession planning possibilities in their business, often there appears to be a lot of options. However, we have determined that there is only the following:
Gift the business to family.
Have staff members purchase the company.
Use stock for staff to purchase.
Have partners purchase the company.
Have an outside establishment purchase the business.
Perform an IPO.
Remain the CEO yet be uninvolved and not needed.
Sell the assets of the company.
What are the most popular of these options in succession planning?
Over half of owners have an outside establishment purchase their company.
Relinquish the business to an offspring.
Have partners buy them out.
A very small percent have employees buy stock of the company.
In this article, these succession planning paths will be explained with their pros and cons so that you may decide the most beneficial one to use.
Ways to Decide the Best Succession Planning Option:
Action One: Plan your journey to leave prior to your desire to leave. Owners that allow years to organize, will have the most resources for Succession Planning.
Action Two: Each partner needs to create a list that determines their goals and what is available to achieve them. Goals often describe the timeline desired and what amount will be desired. Available tools are the company’s worth, outside revenue, and current company revenue.
By writing out these goals it will become clear with Succession Path will reach each partners goals and what assets will be needed. The partners will be forced to communicate about what could possibly happen and what is not possible.
Action Three: The partner’s goals are determined by the timeline in which they want to leave, how much money they want, and who they wish to take their place.
Action Four: Partners are encouraged to form a team to assess the businesses current worth so that the partners know what goals are realistic. This process usually weeds out the Succession Paths that will not work. Such as, a business that has a lot of worth yet the partner cannot give the dedication required to grant staff members stock, allowing an outside party to purchase the company would be ideal.
Action Five: The Partners have to evaluate revenue of the future company to determine if the money to buyout a partner is even available.
Action Six: Partners have to consider the taxation that could occur because of the Succession Process.
Be aware that during this process, partners have to focus on growing the worth of the business. It will also be required that they look over purchase/selling documents that contain the real worth of the business.
Here is each Succession Plan that could be used.
Grant the Business to Family.
Owners that think about granting the company to family often have emotional reasons backing their decision:
Knowing the person intimately and having confidence in their ability to head the business.
Gives jobs and equity to their family.
Withstands the business goals and morals.
The business will remain local.
The former owner can have a certain amount of activity in the business still.
Although these are all good things, usually any benefit of gaining wealth is significantly less. Most of the time, kin do not have the money to pay for the business or give the owner the amount needed to live comfortably. This forces the owner to remain dependent on the success of the business.
Because family do not have a ton of money available, the owners do not get the money or very little of it at the sell. For owners who need to money from the worth of the business, this completely robs then of the amount they desire to leave the company.
It is very rare that an offspring has the ability or desire to run a business that is quite big and very complicated compared to when the owner was in their youth. Offspring’s that have experience in the business and do well in it, still have no idea how to perform the role you have been in.
To conclude, the cons of an owner gifting the company to an offspring are these:
Time before the owner leaves to organize the collection of money is required in order for success.
The owner is tied to the company’s success.
A certain amount of activity will still be demanded of the owner.
There might not be a qualified or a child that desires to run the business.
Tension can develop in the family as other offspring’s get jealous.
Have Staff Members Purchase
This method has almost identical pros and cons to the method mentioned above. So close in nature that just changing kin/offspring to staff member the lists would be exact.
The business remains with someone they trust.
The same values and environment will remain.
The business will be local.
The previous owner will have their desired finances.
The downfalls of this Succession Plan remain identical to those as the previous method:
Organization is critical for there to be money ready for the owner when they leave.
Their finances are dependent on the business.
A certain amount of activity is required from the business.
Staff members might not be able or desire to be an owner.
A couple of the mentioned above cons could be lessened by the owner if they are proactive in organizing this process before they’d like to leave.
Granting Staff Members Rights to the Business through Stock
Employee Stock Ownership Plan is a legitimate path for owners to use and involve staff members in the process. This stock plan has to directly involving the owner.
Moving the worth of the business to staff members and to this stock plan is ideal for owners that desire to have business move to familiar establishments, keep the business’s values and morals, and that the business stays local.
Owners that choose this stock plan tend to give the staff members more options then a normal movement of ownership to star staff members:
Less taxation. This stock plan allows the owner to discount the taxation of this process. The business is able to cover this taxation that the owner may receive with money from their tax return.
Immediate money. This method could give the CEO the money that desire to leave the company comfortable because of the taxation benefits and that the staff might have some money to give.
An eager staff. Since the staff have a piece of the company they tend to value it more therefore working harder. This has been seen to happen many times before
Naturally, this Stock Plan Succession Process isn’t perfect for the owner. Cons are listed below:
This is an expensive and laborious process for the owner.
It is possible that a third party purchase would produce more money for the owner then what the staff members could produce.
Through this stock process, it sometimes happens that the owner is still dependent to the company.
Staff members might not be keen to this idea or gain as many assets as they’d like.
Through time and organization this process could limit these cons.
Allow Partners to Purchase
This option is quite similar to both of those mentioned above as well.
Here are the pros to having partners purchase the business:
The owner knows and has faith in those purchasing the business.
Maintaining the business morals and values.
Organizing a plan for the owner to stay active in the business.
As the business grows the owner will receive their money while also have some control in their company.
Pros to this method are mentioned below:
The owner does not receive the money right away.
The owner is tied to the success of the business to get paid.
A certain amount of activity must be given by the owner.
The worth of the company is not usually the amount that the owner receives.
Several years are required for the owner to gain the entire worth of the business while protecting the money as well. The owner could be able to keep control of the company for the amount of time that is needed to receive the full amount of money.
Purchasing of an Outside Establishment
This Succession Plan is the most financially beneficial to the owner as it usually produces the most amount of money. If it is a big establishment that buys the business a large amount of money can be required.
Owners who desire to live a very comfortable life after retirement pick this Succession Path. This process is also beneficial to the company as it has opportunity to quickly grow.
Here are the pros:
Highest amount of money for the company.
Most amount of money immediately given to the owner.
Frees the CEO to leave whenever they want.
The business is able to gain wealth without the owner having to be involved.
Although this Succession Plan seems like the obviously best choice, of course it has a few drawbacks so don’t be too hasty!
The main complication that this Succession Process has is that it fails to reach the vast majority of goals for the owner. Most owners do want an offspring or partner to take over the company rather than selling to a different entity.
Following this concern, this method does not always produce cold hard cash. The size of the company and status of the market greatly contribute.
Emotionally this method could be hard as this Succession Plan requires the owner to leave the business entirely after assisting the current owner for a period of time. This is a big part of the owner’s identity that is being sold.
The new owner may have new values and morals for the business. There is no way for the business to stay the same as it is taken over by a new establishment and CEO.
The owner has no way to protect their staff members when the new company takes over the business. This means staff members could be fired or benefits lessen.
Why the last concern is such a big one is because it is seen that many owners worry about their staff significantly during this Succession Plan. They have seen these deals go bad for staff members before and do not want to put their valued staff at risk.
Yet, we do not see this happen often as staff members rarely get fired when a new establishment buys the company. Staff of course have the option to exit the company for aspects that do not deal with the job. Since it is typically a bigger business it is often seen that staff have more room for advancement then before. The standard of pros for the staff members often increase. The new company usually see the current staff members as assets of the purchase.
The cons are mentioned below:
Does not reach most of the owner’s goals.
Part of the owner is now taken from them.
The values and morals of the business are changed.
There are consiquences to this type of sell.
Staff members could be at risk.
If the business is not a large one they won’t have the cash to give the owner for the company. Therefore the owner has no ownership of the business or any cash from the sell.
If you have any questions about this process, give us a call!
Initial Public Offering
This Succession process is very rare, however it can appeal to owners that do not want to sell directly to an outside establishment. The worth of the company is usually the highest in this process. The money comes from many places instead of just the buyers which is beneficial to the business.
This is probably the most ideal looking Succession Process compared to the others:
The company’s worth is at its highest.
Money from multiple places for the company.
Of course, there are cons to this method as well. The owner can be given the most amount of money for the company in this method but may not be able to access it for a period of time.
The value of the ownership of the company is traded for the interest of the business. The owner normally cannot access this money for a certain amount of time. There is also restrictions to how much a when the owner can let people purchase their stock. When the time does come the value of this stock is not the same as when the company was purchased.
The value of the purchase finalization is non-existent as the owner cannot access the money or leave. Typically in this process the owner has to remain with the new business for a while. Although they get to participate they no longer have dictation for the decision of the company. A whole new list of responsibilities are given to the owner that he used to not have, and then ones he did have are taken away.
The business is no longer private. There are new regulations and rules that the business has to follow because it is not a public company. This makes a lot of owners very uncomfortable.
In conclusion this process cons are as such:
Cannot access money after sell.
Cannot leave after sell.
No longer in charge.
Have to follow new rules and regulations.
Owner but Not Active
This Succession Process is an option for an owner that wants to maintain the company as someone who is investing into it. An owner that chooses this plan would want these things:
Remain in charge / in control.
Leave as slowly as they like.
Maintain businesses values and morals.
Protect their assets.
Gain or keep the amount of revenue desired.
Most of the succession processes have all these points but not the last. Here we will focus on the importance of the fifth point.
When addressing smaller companies, owners will prefer to keep their company compared to letting a different establishment buy it with anything but cash.
It is easy to view the cons of this Succession Process:
The owner does not exit the company.
No money is received by the owner during this process.
The owner is prevented of a retirement lifestyle.
The owner’s finances are tied to the company.
Selling of All the Company’s Assets
Only one kind of owner would choose this Succession Process: an owner who desires to exit at that very moment and has not organized any other retirement systems. Selling of all the company’s assets give the CEO the ability to leave quickly with money in their pocket.
However, tons of cons come alongside this method. This will give the owner the least amount of money than any other process because there is no goodwill to be bought.
The taxation on this process is higher than the rest of them too, which dips into the amount of money received as well.
Those who are loyal to the company or working there are left with absolutely nothing in this process.
If the business is not doing well and no one wants to buy it, this option could be suitable to that owner but should never be the road taken if any other is available. Although the taxation is high, with prior organization they can be lessened.
How to Pick Your Process
What Succession Process suits your needs? What process reaches the most of your goals? If other owners are involved, which one is better for them too?
Considering all the pros and cons of the Succession Process can be a beneficial beginning the elimination of the processes. This forms the foundation for your Succession Plan.
The owner’s goals must be present first so that they may predict the purchasers they’d like for the company. Then the goals are the rules that you submit the Succession Processes to until the right one is found.
To get the most worth from your business, selling to an outside establishment or IPO is the best bet. This will give you a clear amount of what you may have for yourself and those you want to benefit from this sell. Only by doing this will the action items become clear for reaching your desired amount. What Succession Process they take is dependent on their Succession Goals.
The Succession Goals and scrutinization of each process will produce the most beneficial one for the CEO to take. Through this process and forming a team to help there will be a clear way to success for any business owner.