Business owners often get so consumed by the day-to-day tasks of managing their company that they overlook a critical task: Making sure they can someday sell their business for an optimal price or effectively pass it to heirs.
“It’s never too early for business owners to begin planning for the transition of their companies,” says Bill McCoy, manager of corporate and commercial banking for Bank of Texas. Preparing an exit strategy, he says, “allows a business owner to fully evaluate options for transferring the business and set up the right mechanisms that will maximize the business’s value.” It also helps protect the business in case something unexpected happens and the succession needs to occur sooner than expected.
Planning Matters
Research suggests that roughly half of America’s privately held businesses could change hands in the next decade, due predominantly to baby boomers looking to retire. Yet fewer than one- third of business owners have a formal succession plan, according to the Small Business Administration.
This lack of planning may explain why only 30% of family-owned businesses survive into the second generation and only 12% into the third generation, according to the Family Firm Institute.
“The biggest risk in not having a business succession plan in place or some mechanism for an orderly distribution or dissolution of the company is seeing a lifetime of hard work, investment of time and capital, be lost due to family conflict, estate taxes, lack of financial planning or litigation,” says Eli Mercado, senior vice president and senior trust officer at Bank of Texas.
Making It Count
The first step to building an effective succession plan involves evaluating the options for passing along the business. That may include selling to a family member, employees or a third party or gifting it to family members. Each option comes with its own considerations, benefits and risks.
A professional banking advisor can help the owner identify the right tools and strategies for passing along the business most effectively and customize a team of advisors to help deploy those strategies. The sooner business owners start working on a succession plan with their advisors, the more likely they will be able to transfer the business when they want and achieve the desired outcome. The advisory team can help the business owner address key issues, such as:
- What is the fair-market value of the business?
- What options are available to finance the transfer of the business?
- What’s the best organizational structure for transferring the business?
- How much value does the business owner need to extract from their business transfer to meet their retirement goals?
- How can estate and other taxes be minimized during the transfer?
- If a family member will inherit the business, how can the owner ensure that heirs outside the business receive an equal share of the estate?
“Every business is different, every family is different, everybody’s objective is different,” McCoy says. “Business owners need advisors who are asking the right questions. It’s a conversation business owners need to be having sooner, so they’re ready when the day comes to transfer their business.”
Bank of Texas offers a full range of succession-planning services and can customize a team of experts to help you build a succession plan that maximizes and protects the value of your business.
Depending on your needs, this team may include an investment banker, an estate-planning attorney, accounting professionals, an insurance advisor and a trust officer.