After years of building up your business it’s almost time for retirement. This is the time that you need to start thinking about succession planning—that last step in a business’ lifecycle. Though it may be the last step, it certainly isn’t the easiest.
There’s a lot to consider. Do you pass your business on to your children? Are there other family members that would like to take it over? Maybe there’s a loyal employee who has proven their competence and shown interest. You need to consider what’s best for you, too.
One question should be at the front of your mind: Do you want to keep a stake in the business or get out of it completely?
In this article, we help you understand some of your options for exiting the business and some considerations for maintaining your stake in the business after retirement.
Know Your Exit Options
There are several different ways that you can approach your exit strategy. Some of the more common options include:
• Shutting down the business and liquidating assets
• Selling your business to a third party
• Transferring the business to family members
• Selling the company to employees
• Merging with another company
Each of these options has its advantages and disadvantages, but it ultimately comes down to your preference.
Some, like shutting down the business and liquidating the assets, will end the business entirely and would obviously preclude you from maintaining a stake. Other strategies allow you the option of staying involved in the business after you retire. Let’s run through several of them.
Three Options for Succession Planning
Your first step is thinking about who will own the business. As the current owner, you have three options:
• Sell your business off completely
• Sell some of your business but maintain a stake
• Transfer management rights without relinquishing ownership
1. Selling your business completely
If you’re like many business owners, you’re expecting the sale of your business to be a significant contributor to your retirement nest egg. You want to make sure that you get the highest price possible.
The most important step in selling your business is knowing what it’s worth. Make sure that you understand how to determine the valuation of a business. Check out GrowGrade’s free online valuation tool for a place to start.
Selling your business out right provides the largest lump sum payment, giving you immediate access to funds. A completely exit also allows you to fully disengage from the business and enjoy retirement. There’s no need to worry about your company anymore. This isn’t enjoyable for everyone, however; many business owner’s dread the day when they’ll no longer have a stake in the business that they built from the ground up.
2. Sell some of your business but maintain a stake
You can choose to sell a portion of the company and retain a portion for yourself. One way to do that is through selling private company stock. Private company stock is a kind of security that is offered by a company to its employees and investors. Issuing shares—and retaining some—allows you to maintain an ownership stake in the company while selling off the rest of it.
Note that you can offer different classes of shares to different individuals. For example, you may choose to issue a class of shares that confers voting rights to some individuals; for others, you may choose to issue shares that entitle them to dividends but not voting rights.
The advantage of this strategy is that you maintain an ownership interest in the business, so you can continue to benefit from its success. However, this could be a disadvantage if the company starts to perform poorly after you retire.
3. Transfer management rights without relinquishing ownership
A third option is to remain the owner of the business but create a succession plan for the management of the business. In this strategy, you continue to have sole ownership, but you can appoint another individual to run the daily operations.
You may choose a child or another family member to be the new manager. Many business owner’s also select a key employee, as they already are intimately familiar with the business. Rarely, bringing in an external manager who is not connected to the business is also viable.
This strategy is perfect for someone who wants to retire from managing the business but still benefit from it financially. However, it may be difficult to find a competent manager who’s willing to run the business without a share in it. You also miss out on the lump sum payment that you might get from selling off part or all of the business.
Steps for a Smooth Succession
Regardless of the succession plan that you choose, here are some considerations for ensuring a smooth transition.
Get input from your family. You’ll want to ensure everyone is one the same page with your decision—especially if you are hoping that some of them will become the new owners or managers
Choose an appropriate legal structure. There are several different legal structures that you can create for owning and operating a business. For example, if you are choosing to leave your business to family, a family trust may offer tax advantages that other structures don’t.
Write an agreement with all parties. A professionally prepared constitution or ownership agreement is essential for a smooth transition. It should clearly set out both ownership and management stakes in the company.
Seek professional help. Most transfers of ownership or management rights are complicated. To ensure the future success of the business, ensure you choose expert professionals to help you, including lawyers to create agreements, tax professionals to advise on tax-sensitive selling strategies, and so on. You’ll also want to ensure you receive a professional business valuation.
GrowGrade can help you with this last part. Check out our free online valuation tool, custom made for small businesses.
