By Rich Gunn, CEPA
Many business owners across America are making the same mistake. They are not thinking about an exit strategy early enough. It is understandable; they are working to build their business and may have no plans to sell or retire for decades. But life is full of unexpected twists that can force these actions to happen much sooner than expected. Having multiple, well-thought-out succession plans is essential to attaining the best outcome. These plans will help the owner ensure that their company will continue to thrive long after they leave, avoid costly conflicts, make an eventual sale easier, and even prepare for the worst possible outcomes. And all of this planning should be done as soon as the business is running smoothly.
The Key to Successful Transfer Planning: Start Early
The first step for the owner is to start preparing their business as if they were going to sell it. This process, it should be noted, requires outside professionals to examine the operation in fine detail to give the business a value range assessment, and optimize it to attract the highest sales price. Preparing the business for sale results in the owner committing to paper all the processes and information an outside manager would need to step in and run the business successfully. Doing so is vital for any transition plan because it will give any person — be it the owner's children or a new management team — the best chance to stay in business.
This preparation is, unfortunately, often overlooked. Most owners have acquired vast knowledge about their business that nobody else has. They have built it up over the years through trial and error, and as the company has expanded, no other single person possesses all the background information that is needed to make informed decisions. Not having this knowledge written down could have drastic ramifications if the owner is incapacitated due to illness, accident or death. The most valuable companies are ones that can run smoothly without the owner.
Owners need to think carefully about what they want to accomplish when deciding to leave on their own terms. They should develop multiple exit strategies: the plan they prefer, plus plans B, C, and even D. There are multiple essential questions they need to ask, including:
• Will they hand the business down to their children?
• Do their children want to take over the company?
• Will they sell the business and funnel the wealth into their retirement and estate?
• Will senior management or the employees want to buy the business?
This is where talking about the succession plan with all the stakeholders (family, senior management, advisors) is essential because the answers to those questions can change over time. It may lead to uncomfortable conversations, but it will allow the owner to make better plans and hopefully avoid conflict when it is time to walk away.
Conflicts and Other Speedbumps
Conflict from the transition plan is the last thing an owner wants. Unfortunately, there are numerous ways conflict can manifest. For instance: If the owner has more than one child, do they split the business between them? What if only one is an active participant in the operation — do they share the profits equally among the siblings? Will key personnel stay with the company when the owner leaves? Addressing these potential conflicts early on will give the owner time to make adjustments and set up contingency plans for when they decide to go.
If the plan is to bring the children in to take over a management role, they should be brought in early. As intelligent and talented as the owner’s heir may be, they probably will not manage every aspect the way the owner did. Early participation by the heir will also help identify knowledge and skill gaps that can be filled either by training or by another employee. It can also bring to light motivational gaps that the heir has and the owner may miss, such as the heir taking on the burden of management when they do not want to be involved with the company.
The Thing No One Tells You About Transfer Planning
Surprisingly, the topic that gives owners the most difficulty is what they plan to do when they walk entirely away. What will motivate them to get out of bed now that they do not have a business to run? If they give the company to family members, can they avoid "coaching" from the sidelines and stepping on toes? And after years of building and managing the business, what will be their creative outlet? This is something that most business owners do not think about or plan for.
Regardless of what the owner decides to do, succession planning is something they should start as soon as possible. Transitions have many moving parts that can change year by year, so they need to hope for the best but prepare for the worst. Having multiple, solid plans will ensure the business remains strong in any eventuality.
BPM Transfer Planning for Ag Businesses
For step-by-step guidance on your ag business’s transfer planning strategy, BPM’s Value Acceleration and Exit Planning team is here to help. Our experienced professionals provide you with all the resources and assistance you need to maximize the value of your company, so you can exit on your terms. Our proven five-step process helps you determine the value of your business today, maximize your future results, and assess where you need to build value to ensure there are no gaps. As Certified Exit Planning Advisors (CEPAs), our services our carefully designed to help you accelerate value while setting your business up for long-term success, even after you make your exit. To learn more, contact Rich Gunn, Partner, today.