Human Resources and Small Business & Startups

Business transition planning

April 30, 2015
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For most business owners, the transfer of their business is the most important transaction in their lifetime. Commonly, more than 80 percent of an entrepreneur’s wealth is tied up in their business. However, most business owners would prefer not to think about business transition planning.

Business transition can include transfer to family members, employees or an outside purchaser. Each requires a different approach needing to be carefully designed and executed.

The lack of a well-crafted transition plan can cause numerous problems for a business and its owners. Unforeseen taxes can erode the owner’s wealth significantly. The sudden death or disability of the owner can leave the company vulnerable, creating major challenges for employees, customers and family.

The business heavily dependent on the owner is especially vulnerable. A business with an active strategic plan focusing on transferring the owner’s knowledge and network to others will preserve business value. The most valuable business is one that can operate without the owner’s presence for an extended time.

So . . . what are the hurdles to creating and maintaining a transition plan?

Resistance to change. Transition planning marks the beginning of significant change. These changes will affect the owner’s professional and personal life. Most people dislike change, especially the business owner who likely loves their business. This is a major deterrent to transition planning.

No time to plan. Planning for retirement or an emergency situation is often deferred or neglected because owners are consumed with the day-to-day operations of their business. They cannot get their heads above the trees. But similar to strategic planning, the most successful businesses over the long term will make this important exercise a high priority.

Long-term payoff of planning. Transition planning doesn’t happen overnight. The process will take at least several months and possibly a year or more. It will require periodic review and updating. Many business owners feel they don't have time when they're consumed with running their businesses. Transition planning is a process, not an event. It can be choreographed to minimize impact on the owner’s operation of the business. You don’t have to eat the whole elephant in one sitting.

Identifying new advisors. Transition planning is a team sport, not an individual endeavor. Engaging an experienced team is critical. Sometimes the professionals are different from the advisors you have used for years. Selecting and aligning individuals who have depth in transition planning will add to the chances of success for your company changeover. It will also make planning and execution processes more manageable.

There are numerous benefits from developing an ownership transition plan. It provides owners with the roadmap needed to achieve their own goals. It provides a plan for the next generation of company leaders. Transition planning enables owners to increase business value and minimize taxes to preserve more of their wealth. It also helps owners determine how much money they will need to net from the sale of the business to maintain their lifestyle as they move to the next phase of life.

Preparing for the future of your business is incredibly important, including planning for a business sale, transfer to family, current employees or an outside party. What resources have you found to be helpful throughout this transition? 

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