By Steven C. Avis
The scene is nearly picturesque. The sun’s golden rays dance playfully over the clear, blue ocean water as it sets low on the horizon. An Adirondack chair is nestled low in the white sand just out of reach of the tide. Your favorite drink is chilling on the armrest. The only thing missing is … you!
Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to let go and plan for your replacement.
The following are five reasons why you may not have an exit strategy; along with the reasons why it’s best to make a proactive plan.
NO TIME
Let’s face it, you have worked hard to build your business and day-to-day operations are consuming. There are deadlines to meet and deals to make. Succession planning can be done — later.
Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to you and your family. If a rushed decision is made, you may get a lower price, or pay more in taxes than you would if you adequately planned. In a worst case scenario, “later” may never come. Your unexpected death or disability might result in succession occurring sooner than expected. Worse yet, without a solid plan the future of the business could be placed in jeopardy.
LOSS OF CONTROL
After years of building your business, you may not want to stop working. Giving up control is difficult. You may worry you will be bored in retirement or your company will no longer flourish if you are not in charge. So you hang on.
Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning you may be able to secure a position after the sale as a consultant. If you want to pass the business on to your children or grandchildren, you can train them to help them achieve success. In other words, a proactive approach brings more control over the end result.
IGNORING TAX ISSUES BECAUSE OF COMPLEXITY
There are a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell. Tax implications of a sale or transfer can be extremely complex.
Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as selling assets or stock. Your company may wind up with unknown costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner, in the long run, can save you a fortune in income tax, capital gains tax and estate and gift taxes. Consult with your tax adviser well in advance of the actual sale.
NOT SURE WHO IS GOING TO TAKE OVER
You may not have a clear-cut successor. Do you have partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP) or to a third party?
In the case of a family business, there are even more questions. What if some of your children are active in the company and others are not? Which child is going to run the company? Does they have the business skills to succeed? Will a formal succession plan cause family conflict? Without all the answers, you may do nothing.
Why doing nothing is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You may sell outright, sell to your children, or you may choose gift interests to family members, or follow another plan. If you don’t explore the possibilities, you leave the outcome to chance.
NOT ENOUGH RETIREMENT SAVINGS
While building your businesses, you may have put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement — especially if you want to pass the company onto family members? Often, there are conflicts between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So you just keep working.
Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.
These are just some of the reasons you may be procrastinating and why you need to have a proactive exit strategy. Start well in advance. Assemble an advisory team that includes your corporate attorney, accountant, estate adviser and other professionals. And if transferring your business to your children, urge the next generation to start thinking about their succession plans.
ABOUT STEVEN C. AVIS, CPA
Steve is a Partner at Haynie & Company, a CPA firm providing assurance, tax, and consulting services. Haynie & Company has extensive experience with audits of public and private companies throughout the world, international and federal corporate tax planning and tax accounting, financial structuring and business succession planning. Email: SteveA@HaynieCPAs.com