If you are deciding to research business succession planning, you are taking the first step to secure your legacy and leaving your business in the right hands. Business succession planning involves a series of logistical and financial decisions concerning how a business owner wants to exit their business. Whether you leave the business by retirement, disability or death, having a succession plan in place is a smart decision.
9 Common Ways to Transfer Ownership
- Redistribution: For a business with multiple owners, you may want to sell your interest back to the company to be redistributed to the remaining leadership team.
- Co-Owner/Partner: One of the most common ways to transfer ownership is by selling your interest to one of your current partners. This decision leaves the company in the hands of someone that understands your values and the way you operate.
- Employee: Sometimes an employee, typically a manager, is the right person to take over.
- Outside Party: Sell your business or ownership shares to a person you highly respect outside of your organization.
- Sale To A Third Party: One common way to transfer ownership is to sell the business to a third party. This could be a competitor, a private equity firm, or an individual investor. The sale can be structured as an asset sale, where the buyer purchases the business’s assets, or as a stock sale, where the buyer purchases the company’s stock.
- Transfer To Family Members: Many business owners choose to transfer ownership to their children or other family members. This can be a tax-efficient way to transfer wealth within a family. The transfer can be accomplished through a gift or a sale of the business to the family member(s).
- Management Buyout: A management buyout (MBO) is when the current management team of the business purchases the company from the current owner. This can be a good option if there are capable and interested members of the management team who want to take over the business.
- Employee Stock Ownership Plan: An employee stock ownership plan (ESOP) is a type of retirement plan that allows employees to become owners of the company. The company sets up a trust and contributes shares of stock to the trust, which are then allocated to employees based on a formula. This can be a tax-efficient way to transfer ownership to employees.
- Liquidation: In some cases, the business may not be able to be sold or transferred to a new owner. In this case, the business may be liquidated, and the assets sold off to pay creditors and distribute any remaining funds to the owner(s).
Determine the Value of the Business
One of the first steps toward your succession planning should be to determine how much your business is worth. There are several ways to determine the value of a business. Such determinations will vary depending on the industry of the business.
The most important decision is finding the person that you trust with your business.
- Asset-Based Approach: This method calculates the value of a business by adding up the value of all its assets and subtracting its liabilities. This approach is commonly used for businesses with a lot of tangible assets, such as real estate, equipment, or inventory.
- Earnings-Based Approach: This method calculates the value of a business based on its earnings or cash flow. Two common approaches are the capitalization of earnings method, which values a business based on its future earnings potential, and the discounted cash flow method, which calculates the present value of future cash flows.
- Market-Based Approach: This method looks at the market value of similar businesses to determine the value of the business being evaluated. It typically involves analyzing financial ratios, such as price-to-earnings ratios or price-to-sales ratios, of publicly traded companies in the same industry or market.
- Industry-Specific Approaches: Certain industries may have specific valuation methods, such as the “multiple of revenue” method used in the software as a service (SaaS) industry or the “per-bed” method used in the healthcare industry.
- Rule Of Thumb: This method uses a general guideline, such as a multiple of revenue or earnings, to quickly estimate the value of a business. It is often used as a starting point for negotiations, but should not be relied upon as the sole method of valuation.
It’s important to note that there is no one-size-fits-all method for valuing a business. The most appropriate method depends on factors such as the type of business, its financial performance, and the purpose of the valuation.
Find the Right Successor
The most important decision is finding the person that you trust with your business. No one wants to spend their life building a business only to watch someone else run it into the ground. In the right hands, your business can continue to flourish. It’s up to you to find someone that is trustworthy, competent and that truly cares about your business as you do.
Once you choose the successor, don’t forget to train them if needed. You need to show the new owner the ins and outs of your business while taking inventory of the new owner’s assets and skill gaps. Understanding where your successor may not excel is vital information. You can then develop a plan to mitigate those skill gaps to ensure long term success of the business.
Set Up a Succession Plan Now
Maintaining a stable, profitable business is an ongoing battle that can consume the majority of your time and effort. Retirement is sometimes an afterthought and developing plans to turn your business over may not be a priority.
If you are interested in preparing a succession plan for your business, contact The Law Offices of Cipparone and Cipparone.
**This blog is for general informational purposes only. Cipparone & Cipparone, P.A. does not distribute legal advice through this blog. As such, this blog does not constitute legal or other professional advice, and no attorney-client relationship is created between the reader and Cipparone & Cipparone, P.A.Tags: Business Law, business planning, Business Succession, Business Valuation