Over the next 10 years, many owner/managers (i.e. the boomers) will face a major decision in their business life: “what to do with my business?” Years ago, most businesses would be passed on to the next generation, but not today.
Before you even start a succession plan, ask yourself three key questions:
When? — You need to set a succession target date that will give you enough time to implement the various steps in your plan. Ideally, you should allow five years to create and carry out the plan.
Who? — Who would want your business? If it is the next generation, do they really want the business and are they capable of taking it over?
Timing is key to next generation succession. It cannot be too premature since the successors need time to develop their skills and knowledge; but the succession should not be excessively overdue either.
If, instead, the current management is a viable successor, the grooming period and the buyout can be structured over several years.
Or, might a customer, competitor or a supplier be well positioned to buy your business? You should be in the best position to identify the most suitable potential buyer(s).
How?
Transferring the business to the next generation usually involves a significant amount of tax planning. To defer the tax, one common method is to freeze the value of the business at the current value and transfer its future growth to the next generation.
If you plan to sell the business to management, financing and a good tax planning structure are essential.
Selling to an unknown party could take one to two years once the business is ready for sale. Normally this process is conducted through a business broker. It may take as long as three to five years to get your company ready for sale.
