Passing the Torch: Communication is key in business succession planning

You’ve built and run a business for years, maybe decades, but now it is time to decide what happens next. Do you pass the reins to a family member, transition ownership to a trusted employee, or sell to an external buyer?

No matter what direction you choose, you need to be prepared, says Heather Yeung, an attorney with Davis, Agnor, Rapaport and Skalny. Starting early and engaging in open, honest discussions with everyone involved are crucial.

“Talk about it – early and often,” says Yeung, who frequently works with business owners in various stages of the exit planning process. While some business owners simply want to sell and move on, many are invested in how the business will continue after they exit.

“When you’re passing your business on, whether to a family member or a buyer, I see people tend to go one of two ways. Some people are ready to hand over the keys and walk away and never look back. The other group of people see the business as their baby and they want their baby to be cared for,” said Yeung.

“If your goal is to see your business continue to flourish, even though you’re out of it, then you’re going to want to scrutinize your buyers,” she added. “Have them prove to you that they know what they’re doing, that they’ve been in this industry before, or they’ve taken classes, developed a business plan, or have consultants ready to help them out.”

Leaving the business to children, family, or a loyal employee might seem like an easier solution, but Yeung cautioned business owners against making assumptions. Children may not want to talk over the family business, siblings may not agree on how the business should be split up, or the vice president of 20 years might be ready for something new. Tax implications and other considerations also need to be fully understood and accepted by the recipient.

“Clients don’t often think of the tax cost,” said Yeung. “Even if you buy the company for zero dollars, you are being gifted a big business that makes big money – and that is suddenly an asset on your taxes. That might put you into a different tax bracket and you’re going to have all these things that you didn’t think about. You need to ask, ‘if I take this on, what does that look like for me?,”

Selling the business outright still requires a significant amount of preparation, which can take months or years to complete. To get the most out of a sale, the business needs to be in a strong position, financially and operationally.

“Getting things in order is going to help you get the maximum value,” she said. “Updated marketing, having your finances in order, having your corporate records in order, having your employment issues in order.”

Nothing moves as fast or as easily as sellers would like and too often, Yeung sees cases where problems with record-keeping, financial reporting, and other inner-workings of the company are uncovered as part of the sales process.

“I did one last year where the business owner was selling to his employee. When the owner bought the company, that sale got screwed up and nobody realized it. I had to put the brakes on with my client because he was about to buy a 20-year-old hot mess.”

So when should business owners start planning for succession? Yeung says it should be in the back of their minds essentially from the beginning.

“Just start thinking. What do you want? What do you think your employees are going to want? What do you think your children are going to want?” she said, suggesting that at least five years out is a good time to begin making big picture decisions. But even with the best laid plans, transfers still take months, or longer to complete.

“People come to me and say ‘I’m ready to sell; I have a buyer; let’s go’,” she said. “But the process will probably take at least six months from meeting the client to closing the deal, and sometimes it’s much longer.”

Sibling and family dynamics can also complicate the situation. While there is no way to work around personality and relationships, planning ahead allows time to work through tough situations and mitigate or prevent sour feelings. There is only so much that can be controlled once the business succession is complete, and owners need to be able to separate emotions from the transaction.

“Planning ahead and maintaining open communication is crucial. It’s about making sure that the legacy you’ve built is in the hands of those who are prepared and passionate about continuing it,” says Yeung.