If you’re a business owner, I bet that calling it a “job” feels like an understatement. From that first spark of a creative idea to managing a full-fledged business, your business is your life. And because starting and running a business is all-encompassing, it’s unlikely that in your few spare moments, you think about how and when you’ll one day exit this ownership role. But after all the years of blood, sweat, and tears that go into building a successful and sustainable business, it’s inevitable that you’ll face decisions surrounding the final transition of your company in the future.
It’s just reality that every single business owner will transition their business at some point, which means advanced planning is critical to achieve their goals—both for their business and family. Unfortunately, less than 25% of business owners have established a formal written business succession plan. (1)
This failure to plan is usually due to two reasons: first, business owners are much better working in their business than on their business—as they should be; second, the process of creating a proper succession plan can be difficult and overwhelming. Instances like these are where professionals can greatly assist owners by illustrating and implementing a clear and concise process from beginning to end.
Let’s take a look at what our Grace Wealth Management Group team will cover in our stage-by-stage process.
Stage One: Initial Discovery Meeting
Defining exit objectives and goals:
- What is your desired departure date?
- What are your income/financial security requirements?
- What exit routes are open to you?
Stage Two: Information Gathering
Personal financial analysis:
- Review existing financial, estate, and business plans.
- Determine gaps in each of these plans, if any.
- Discuss wants and needs.
Stage Three: Determination of Business Value
Current valuation and the development of value drivers:
- Analyze each exit route to determine how to protect and increase business value and understand the tax implications of ownership transfer through sale, gift, and estate.
- Obtain a formal valuation performed by an independent third party to set a fair price for company stock based on a consistent methodology for valuing the stock in the future. Include a reasonable discount for lack of marketability and minority interest, if applicable. This provides a benchmark for buy–sell agreements and executive compensation, equity-based plans, etc.
Stage Four: Choosing an Exit/Transition Route
- Sell to an outside third party (financial or strategic buyer).
- Sell to employees using an Employee Stock Ownership Plan (ESOP)*.
- Sell the business to one or more key employees (management buyout).
- Sell to remaining shareholders.
- Transfer the company to family member(s).
- Retain ownership but become a passive owner.
Stage Five: Implementation of Chosen Business Exit Route and Post-Transaction Servicing
- Engage shareholders and the company to execute the chosen business exit route (external or internal sale or transfer).
- Develop a contingency plan for the business (define key succession management, and be able to answer who will run the business in the event of a death or disability of current operational shareholders).
- Develop a contingency plan for the owner’s family (financial, estate, and charitable planning).
- Develop an ongoing servicing plan for the business and family (ongoing review to ensure that planning is being followed and to advise in the event of life changes within the family or succession management).
We’re Here to Help
Passing the torch as a business owner undoubtedly involves a range of emotions. And it’s best to make any important business decision—and especially when it’s emotional— with a financial professional by your side. We at Grace Wealth Management Group would be honored to serve as an objective and knowledgeable third party to help you navigate this emotional transition and whatever comes next. Schedule an appointment here or call me at (949) 631-3840 x2 or email jbang@cfiemail.com today.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visit www.financialadvisorirvine.com.
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