Do you have a transition plan that protects your business?

By Michael Pappas, CPA, director in charge of Barnes Wendling’s accounting and assurance services department.

If you’re like many business owners, you probably think you have plenty of time to plan your transition. After all, you may have years — or even decades — until retirement, and there’s no need to be thinking now about something that far ahead. Or you may be one of the many baby boomers thinking the time is near and wondering if you have done what is necessary to transition the business? Worse yet, what if something unforeseen happens today? Regardless of your age and the stage of your businesses, failing to have a transition plan in place could be a fatal event.

Don’t delay your transition planning.
Most business owners are so consumed with managing the day-to-day operations that they don’t think about what will happen when they’re ready to transition the business. And when it’s time to go — either planned or unplanned — they have done very little, if anything, to prepare. Succession planning gives business owners the opportunity to plan to exit the business, transition the business to someone else, and be fairly compensated. Knowing the value of your business is critical. It’s recommended that you have a business valuation done by a professional who understands your industry and can be objective in determining value. Owners have a perceived value of what their business is worth, but because they are so involved or do not understand how a potential buyer would look at their business, they are often off the mark with an inflated valuation.

Mergers and acquisitions are a common way businesses grow, especially in situations where your business may either complement or diversify the business of the company making the acquisition. Knowing the value of your business will allow you to be better prepared to analyze offers presented to you if someone is interested in acquiring it.

Answer the tough questions.
When creating a transition plan, ask yourself the following questions:

  • When you put the business up for sale, is there someone internally who has the interest and the means to buy it, or will you have to find an outside buyer?
  • As a contractor or a service business, are you so invested in the business that when you leave, most of the business goes with you? Or can your team of employees continue those relationships and keep generating revenue without you?
  • Are there fixed assets that transfer to the successor that will be usable and offer a quick return on investment?

Work with your trusted advisers, including your CPA, attorney, and banker as a team to develop a business transition plan, and then be prepared to review and modify the plan on an ongoing basis based upon changes in market conditions or tax and/or estate laws. Working together, those professional advisers can bring all of the relevant information together, allowing you to create a transition plan that ensures that, with or without you, your business will continue to thrive, and you — as the owner — are compensated for the investment you have made in your business.

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