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North Bay Business Journal

Monday, May 26, 2014, 5:30 am

Business succession planning: The details and the emotions

By John Whiting

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    Editor’s note: This is the second of two articles on business succession planning.

    John WhitingIn our last article (“Are you and your business ready for a sale?,” North Bay Business JournalMay 19, 2014) we discussed the science behind being prepared to sell your business, addressing what to consider from a practical perspective — before getting an offer. But there’s another important aspect of every business sale, and it’s often overlooked: the emotional, personal side.

    Whether your business was passed down through generations or you built it up on your own, you’re connected to it both emotionally and, with cash flows so closely related, logistically. So how can you put yourself in the best personal and emotional position possible before a buyer comes knocking with a great offer?

    Having worked with countless business owners wishing to sell their company, we’ve seen it done many ways. Too often, though, it’s a reactive response to an offer that sounds “too good to pass up,” catching the owner off guard and forcing him or her to negotiate from a place of weakness. Once the process starts, owners are often ill-prepared and in many cases limited in their ability to fully understand what the deal means to them financially and from a tax standpoint, let alone emotionally.

    Well-prepared business owners and their spouses have taken time to create a thoughtful financial plan that anticipates their personal goals, what those goals will cost, and what strategies they can employ to help reduce future estate and income tax prior to contemplating a potential sale. If you know how much of the proceeds from a potential sale you need and how much in after-tax proceeds you may likely receive from a transaction, there are several effective methods of transferring wealth prior to the sale that can significantly reduce your estate tax burden.

    Jay Silverstein

    Jay Silverstein

    The further in advance of a transaction these strategies are employed, the less risky they are, says Jay Silverstein, a principal with the accounting firm Moss Adams, LLP, who specializes in working with business owners contemplating a transaction. “A comprehensive planning process helps you and your spouse anticipate what your lives may look like after the sale of the business,” he says. “You can mentally prepare for the release of a business you’ve built and nurtured.”

    Lois Lang

    Lois Lang

    What will it feel like to hand over control? How can you begin preparing for this next phase of your life? What will you and your spouse do with your new freedom? “Don’t underestimate the need to talk through these questions together,” says Lois Lang, a partner at Evolve Partner Group, which specializes in business succession planning. “Pick up a journal or your iPad and start scribbling down your thoughts.”

    Another advantage to thoughtful planning is its ability to help you anticipate expenses you may not have considered — expenses that will likely fall on your shoulders. It’s not uncommon for a business owner to rely on his or her CFO or controller to oversee personal real estate holdings, handle personal bookkeeping, and generally act as a personal CFO. Once the company is sold, however, these resources often go away, but the need doesn’t. Having a plan for how to handle your ongoing personal service needs is critical in the emotional and financial transition.

    A good plan anticipates sources of cash flow such as investment return, installment sale payments, Social Security income, and income from rental property. The plan should also detail demands for cash in the form of specific goals such as basic living expenses, travel costs, replacement vehicles, large onetime purchases, and gifting plans. When creating plans, we often build in expenses like weddings, personal care, and caring for an aged parent.

    Building in factors for inflation and conservative investment returns will afford you comfort in knowing your plan is realistic. We see too often that owners are so caught up in the heat of the deal that they’ve made no plan for what they’ll do with the proceeds before they pull the trigger on the sale. In absence of a well-thought-out plan, they’re inundated with pitches and proposals that may or may not fit with their actual needs. A personal financial plan that clearly identifies the appropriate level of risk for them and contemplates the investment strategy that will help them meet their specific needs is a critical tool for avoiding rash decisions that may have long-term negative effects on their financial well-being.

    Emotional readiness is another important element that requires time to fully contemplate. What will your role be after you sell your business? What’s your purpose? “We frequently hear business owners say it feels like putting a child up for adoption,” says Lang. “While there are days you’d gladly release your precious child (the business), you’ve still invested a lot of time, energy, and emotion into growing it, and there are parts of you that will feel lost without it.”

    Most people overestimate the amount of time they want to spend with a hobby or sport. There’s only so much golf you or your body will tolerate in a week — yes, really! Do you want to volunteer at your favorite charity or social club? Travel? Be a full-time grandparent? Start another company? Be a consultant within your industry? The options are endless — preparing now, by thinking through those options and beginning the transition of your time, will ease the hole that can be left when your business is no longer consuming every waking moment and stealing some of your sleep.

    “One owner told me, ‘I couldn’t believe what a stretch of 14 hours a day, without the business, was going to feel like,’ ” Lang says. “He slipped into a depression that was hard to climb out of. With his wife’s support and some professional help, he pulled out of it, but now he knows he should have put as much effort preparing for this part of his life as he did with his financial plan.”

    At the end of the day, being prepared is the most important factor to consider prior to selling your business. Establishing your goals early, understanding how your cash flow will work after you don’t have the business to lean on, and being emotionally ready to transition — with a clearly outlined plan of what you want out of this next phase of your life — will help make this important transition much easier.

    John Whiting (707-535-4167, john.whiting@mossadams.com) advises business owners on the transition from active management of their company to financial independence and creates personal financial plans for individuals and families.

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