Plan early to ensure the best future for you and your company.
You've spent years devoting much of your attention to your business. Now that retirement is within sight, what will become of the company?
There are many possibilities, and what's right for your business depends on how soon you hope to retire, whether a family member or longtime employee is interested in taking the reins, how the economy is doing, what the competitive situation is like, and what you hope to do with your time when you relinquish control. The one thing that is true regardless of the circumstances is the timing of when you should start making plans: “Sooner rather than later,” says Tom Hall of Tuesley Hall Konopa in South Bend.
“The planning needs to start many years before a person is ready to retire,” says Brian Lake, partner with Barnes & Thornburg in the South Bend office. “If they wait until just before they retire, it's almost too late. You're going to come up with a much better, well-thought-out result if you plan ahead.”
And if you don't put some plans on paper? “The real reason to do it is to avoid the default scenario–the owner of the business dies, and the business ends up in his or her estate,” warns Jim Jorgensen, attorney at Hoeppner Wagner Evans in Valparaiso and Merrillville. “There are tax consequences, and in all likelihood the business will have to be sold, and often the business is going to lose part of its value.”
The question of what to do with your business is part business succession planning and part estate planning. According to George Carberry–of Burke Costanza & Carberry in Merrillville, Valparaiso and Chicago–“in most cases, the business is the largest asset they have that you have to deal with,” so it's a major component of estate planning for business owners.
As you start to think about retirement, here are some of your options for dealing with your business.
All in the Family
Passing the business along to the next generation is appealing, but requires just the right situation. “Fewer than half of businesses make it to the second generation, and only 30 percent of businesses make it past the second generation,” Lake observes.
“If the business owner is fortunate enough to have a son or daughter in the business willing to take over, it's a question of selling or gifting the business ownership to the next generation,” Carberry says. Sometimes this happens as part of a will or trust, but often the deal is done a lot sooner.
Truth is, the structure of the deal is not necessarily the biggest consideration when it comes to a family succession plan. The first task, says Hall, is to “identify who your successor is. Realistically assess who has the capability of succeeding; it may or may not be a family member.”
And if a family member tops the list, “you want to get the family member involved for several years at least before the retirement,” Lake advises. Handing the business to a family member who has no familiarity with the company, or with running a business in general, may be the subject of great television comedy, but in real life it's not funny.
“You're going to want to bring that person into the business to learn the business,” Jorgensen agrees. As part of the transition, it's common to transfer incremental ownership as the family member gets settled into the company.
Time for a Sale?
“The second option is to sell the business,” Lake says. The question becomes, to whom?
One great option is to sell to a key employee or group of longtime employees–people with a passion for the company and the knowledge to make it succeed for years to come. As with passing the business to a family member, this course of action requires carefully choosing the successor, and if at all possible, spending time on an orderly transition that lets the successor get up to speed.
An alternative that still keeps the business in interested hands is an employee stock ownership plan, or ESOP. It's a way to gradually transfer ownership to not just a key employee or two but all of those whose daily lives revolve around the company–the employees. This has the added benefit of giving employees more “skin in the game” as part owners, which can be a great motivator for corporate success.
If you're selling to insiders, you may or may not be able to get your equity out of the business quickly. Some arrangements take place over a number of years, Carberry says, and feature installment payments. Other situations might require funds from outside investors who assume part ownership. And some sales cover just the business itself, and not the real estate, Carberry adds. The new owners then pay rent, which provides the retiree with an ongoing source of income.
If a sale to an inside buyer is not an option, it's time to find someone on the outside. Again, there are lots of possibilities. Perhaps you'll find a strategic buyer in a different region or industry, who values your company for the opportunity it provides to diversify into a different line of work or a new geographic market. The buyer could be a financial investor, seeking a new source of long-term income or the opportunity to sell later on and turn a profit. Or, the buyer could be a competitor.
Whoever the buyer is, “you want to sell your business while it has the maximum value,” Jorgensen says. That's easier said than done, but again, you'll achieve the best results if you don't have to hurry. “If your plan is to sell, you want to be able to sell when it's worth the most, and that probably will be at a time when you don't have to sell.”
If you're like a lot of business owners, the thing you'd rather avoid is having your business disappear upon your departure. No doubt, orderly liquidation is at the bottom of the list of preferred possibilities, and with proper planning, there's a good chance it won't come to this. Sometimes, though, it's the only option, especially with certain kinds of small businesses, Carberry says. “To the extent that the business is personal-service oriented, unfortunately many times it's often the only prospect available.”
It Takes a Team
Whatever you do, don't do it alone. You need advice and support from a number of people, regardless of the direction you choose to take.
“Have a team of professionals sit down and try to work through all of the many parts and pieces,” Hall says. “What are the options to sell the business and what are the options to keep the business alive and properly managed?”
That latter part is a critical consideration. The business succession process can take time, and depending on the situation, you may or may not still be involved day-to-day. If your business is waiting to be sold, it needs to stay healthy in the meantime in order to maintain its sale value. That time period could be months or even years, so careful planning and oversight are important.
Who should be on the team? “The family business owner frequently receives simultaneous advice and guidance from numerous different sources,” says J. Brian Hittinger of Krieg DeVault LLP in Schererville. “These sources include the lawyer, accountant, banker, insurance professional and other consultants to the business.”
It's important for business owners to seek the coordinated advice of all of these professionals, he says. “Without such coordinated advice, the conflicting ideas from the various professionals will convolute the decision-making process and encourage delay.”
What's On Your Mind?
As complicated as it all might sound, the most difficult part may be the emotional component. “It's hard for a business owner who started the business to give up the business,” Lake notes.
The business, in fact, “is like a member of the family, and it defines who they are,” Jorgensen says.
“Business owners often don't like to address this,” Carberry agrees. “They've built the business up and don't want to let go.”
Sometimes, you don't have to let go, at least not completely. It's not uncommon to arrange a transition that keeps you around on a consulting basis, perhaps part-time, with a lot of flexibility possible. That can be good for the business and good for your own peace of mind, too.
And, it can help you ease more gently into your different, retired life. As Lake notes, “No matter what you do with your business, one of the most important and difficult questions is what you plan to do after the sale. A lot of times people get so caught up in the sale, now their baby is gone, what do they do?”
A tough question, indeed–tough enough to cause a lot of business owners to simply freeze up and do nothing. But doing nothing is the one thing you can't afford, says Jorgensen, because “the longer you wait, in all likelihood the fewer options you'll have.”
Just remember–talking about and planning for your retirement is the best way to make it a positive experience. And if you're starting early… well, right now it's just talk, and what could that hurt? “All you're doing, at least initially, is talking to somebody,” Jorgensen says. “You're not going to have to make a decision that day.”
–Steve Kaelble
