Phase I – Assessment

Because your business is probably your largest asset — and because it also is probably your largest single source of income — your decision-shaping and calendar of events for your plan are going to be built around assessing alternatives to preserve the asset, nurture the asset, monetize the asset or liquidate the asset for optimum results for you, your family and the business. Some of the questions you should ask as you begin the journey of planning your succession are:

• What is your business really worth?
• What do you really need in retirement?
• How does ownership translate into retirement assets?
• Who will step into the ownership role(s)?
• What’s your Plan A and Plan B scenario?
• What will you do next?
• What is your timetable for fully transitioning out?

So, what is your business really worth? If you’ve never had a formal or even informal valuation of your business, now is the time to schedule it. You will need a reasonable estimated value of your business — and an honest assessment of after-tax available cash to you in the event of a sale. You need a valuation regardless of whether you desire to sell to a third party or to your management team, or create an ESOP, family gifting or charitable gifting options.

There are formal valuations and there are informal valuations. For the purposes of succession planning, most small business owners simply need a valuation professional to determine an estimation of value within $100,000. Don’t try to calculate the value online with a low-end, do-it-yourself tool. All of your decisions going forward derive from this number, so it pays to consult a professional.

Once you have a clear estimation of value, you will want to visit with your investment advisor or financial planner to assess your personal finances, current and post retirement cash flow, retirement goals and sources of cash flow up to your official retirement date. In my experience with succession planning, this process will take at least three separate meetings in order to:

• Determine what you want to do in retirement
• Assess the lifestyle you want to maintain
• Incorporate the vision of the next successful chapter of your life into the succession plan

During this discussion, you may want to decide how much, if any, you want to continue working in the business. Independent of any valuation or legacy issues you carry, what would be a fair amount for you to be compensated in a less than full-time position at the company? What are the primary areas where you could add value to the business on a continuing basis?

Establish Plan A and Plan B

This decision, of course, hinges on the most likely acquirer of your business. You will need to rank on a 10-point scale the likelihood and viability of a sale or transfer to:

• Your own family members
• Your current management team or business partners
• Your employees taking ownership stake through an ESOP
• A strategic buyer
• A private equity firm

Whichever option gets the highest ranking, call that “Plan A.” But call the second highest option “Plan B.” We’ll talk more about why having two options for potential owners are important in the execution phase of succession planning.

In addition to ranking a potential successor or outside buyer, you will need to obtain and review all of the following agreements and legal documents. You may find during this process that there are documents you don’t have and will need to create.

• Will and estate documents
• Emergency management plan – who gets the keys if you are temporarily out of commission
• Shareholder agreements, often called buy/sell agreements
• Bylaws or operating agreement of the business itself – voting, officers, classes of stock, etc.

The final piece of your Phase I Assessment is to target a specific year that will be the year of your exit — no matter what form that takes.

As you assess your current situation, including decisions around successors and timelines, your CPA should support you with a clear picture of cash flow, debt and proper entity structures. Your CPA can also help you assess certain buy-out scenarios that may involve selling to internal stakeholders, courting an external buyer or creating an ESOP. Rely on your CPA to weigh the pros and cons of your Plan A and Plan B to ensure that they are viable choices.

Once your first 90 days of planning are completed, you should begin to understand where the gaps lie in order to set the timeline for succession planning execution. Review each step that has been accomplished so far with your advisory team. Most of all, congratulate yourself for moving toward a viable plan for your business transition.

To continue reading about succession planning, read: Phase II – Sharing and Executing the Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas.