In the end, we will all leave our companies. For some of us, we’ll be kicking and screaming the whole way. For others, it is a pleasant destination. This blog outlines the ways people leave their companies and some considerations you should keep in mind for when that happens.
No matter how you leave your company, business succession planning is vitally important to ensure that there’s a smooth transition between you and the new owner, saving you headaches and increasing the value of your company.
Sale of Business
Whether you’re tired of owning the company, want to move on to different things, or the price is right, a sale of your company may be the direction you’ll be taking when you leave. For most business owners who establish plans, this is the end goal. A sale is a more predictable and more positive outcome than many of the other choices.
Having a standard operating procedure, filed trademarks and patents, a great legal framework and systems for all of your repetitious processes will make your company more attractive to potential buyers. The idea is to make the company able to operate without you and have valuable assets for any potential purchaser.
To ensure a good sale, you’ll want to run your business so that it is attractive to a potential buyer. This means you will need to maximize cash flow, increase company assets, decrease costs, and create as many protections and systems as you can.
Illness or Leave
Sometimes, we get sick, someone close to us gets sick, or we need to leave the company for whatever reason, and we can no longer work. For these circumstances, you will need a plan in place so that the company can keep working without too much interruption. This interruption can ruin a company if it is significant enough. During this time period, as owner, you should still receive the profits of the company, but you’ll only receive the profits if your company is profitable. You will likely have to hire additional help to fill your shoes or a manager to take over the company’s operations.
A proper plan for illness or extended leave should include who will take over, and significant amount of detail on how to run the company. You should have your legal documents in order as well as your standard operating procedure and other systems clearly laid out for the smoothest transition. One thing to not forget is to have a contract for the person or persons who will be filling your role because you don’t want to have to create those when you are otherwise occupied with your illness or the reasons you can no longer work.
Gift to Employees
It isn’t as common as most of the other exit strategies, but some employers like to gift their company to their employees. These employers do this for a variety of reasons, but there are ways to ensure that you still receive some value upon retiring or your family receives some value in the case you pass away.
For a transfer while you’re still living, consider a sale over time, investment products or some other structure so that you are entitled to receive some income or payments upon your exit. One of the best ways to set this up is to exchange the company for a promissory note and receive payments on that note over time.
Gift to Heirs
It is not uncommon to give your company to a child or relative when you’re getting ready to retire. In this circumstances, you can still structure your transfer as you would a gift to your employees, retaining some income or payments upon your exit.
Close Down
Sometimes it doesn’t make sense to sell the company, but rather it makes sense to close the company down. This can happen when the company isn’t profitable, or the company wouldn’t work without you (like a personal or professional services industry). In these instances, you should see if there’s anything you can sell from the company to give yourself some value.
If your plan is to close down, opposed to the other options, you may want to accumulate assets that have a decent resell value or investment products throughout your career in this company. That way, you’ll have some additional income when you leave the company.
Bankruptcy
Unfortunately, a lot of companies are forced to go through liquidation bankruptcy, leaving them with no assets and no company. This is one of the worst outcomes for your company as it will leave you with little to no income. In order to prepare in case this happens, you will want to ensure that you are not fully invested in your own company. As any financial advisor will tell you, it is important to diversify your investments in case one of them fails.
If you’re planning on retiring based on the sale of your company, and the company goes through bankruptcy, you’ll have virtually nothing, but if you invest your personal assets in other areas, you won’t lose everything if the company does end up having to file for bankruptcy.
Death
Worst case scenario, we die at our desks. Though not specifically at our desks, this scenario is becoming more and more common. In retirement, some people create businesses and continue to work at those businesses until they become sick and pass away. Typically, these individuals had no intention of selling their company and needed the continued revenue to support them in their retirement.
What happens to our company when we die? If there’s no business succession plan in place, it’s the duty of your executor to dispose of the company, whether that means giving the company as a whole to an heir, dividing up the company or selling the business to a third party buyer. If there is no plan in place, without you at the helm, your company may go under or lose all of its value before your executor can do anything with it. Alternatively, your successor may not know how to run the company and you may be giving them an asset that creates only stress with no value.
You can make this process smoother but having a will that includes a special executor or trustee to handle the affairs of the business. Without this, your executor will be unsure how to handle the company affairs and will certainly get a lower price for it than your estate should have. In order to provide for your heirs in the best way, you should have a business succession plan.
Setup
To set up your own business succession plan, you start with the ideal plan. Most of the time, this involves a sale at some point in the future.
To maximize your value, set up:
- Legal Foundation
- Standard Operating Procedure
- Trademarks and patents
- Written policies, procedures and systems for uniform work flow
- Clean HR files
- Contracts to make a smooth transition
- Clean bookkeeping and tax returns
- Low expenses, high consistent revenue
“The best laid plans…” as the apothegm goes; our plans don’t always go as we want them to. Therefore, we need to set up backup plans.
The first backup plan is in the case of death, your estate plan. If you’re prepared for a sale of your company, you’re already mostly ready for a transition based on your demise, but you will need a will, power of attorney and possibly a trust if it applies to your situation.
The second backup plan is in the case of your illness or leave. For this, you will want, in addition to everything else you should have a potential manager or interim manager selected with a contract ready to put that person in the management position. Keep in mind, here, that a power of attorney can put someone in this role, but the same person who is managing your personal finances may not be suited for managing the company. If you choose to decide ahead of time who the manager should be, you may want to limit your financial agent’s ability to change or remove the manager.
For more information on business succession planning or to schedule your free consultation, contact us at richard@lawplusplus.com or by calling 919-912-9640.