By: Jeff Pocock
Many of the business owners will likely choose the traditional route by passing their businesses onto the next generation. For those hoping to preserve their legacy and maximize their business’s ROI, however, this isn’t the only option.
While keeping it in the family may seem like the best gift you can give, in reality only 30 percent of businesses will survive the second generation. A more effective route would be to explore other succession options available to you—a process that will require a little soul-searching and a lot of planning.
Step 1: Determine the value of your business.
Before you even think about drafting a succession plan, get a valuation first. Determining the value of your business will give you an idea of what your goals for succession could be—and help you effectively set the expectations for other stakeholders in the business. It will also allow you to set the dining room table, so to speak, and have a productive conversation with your prospective successors. When you have firm numbers in hand, it’s easier to gauge a successor’s interest—and determine if they’re really interested in the job—or if another route would ultimately make more financial sense.
Step 2: Establish your succession goals.
Often, business owners equate succession planning with “tax planning.” In actuality, succession planning extends far beyond taxes. It’s an opportunity to sit down and determine what your goals are—and then develop a roadmap to achieve those goals. Are you thinking about starting a new venture? Need extra funds to send a kid through university? Hoping to continue earning money from the business even after you retire? Are the proceeds going to be enough to support your lifestyle in retirement? Each decision will require a different succession timeline and level of liquidity. Perhaps this process is more aptly called “transition planning.”
When brainstorming succession goals, consider these questions:
What do I want to achieve personally?
Who are the stakeholders and what do they want?
What level of contingency planning is needed?
What do I want to achieve from a business perspective?
What are my personal financial needs—desired versus possible?
Step 3: Weigh your options
Once you’ve determined your succession goals, it’s time to evaluate your liquidity options. While passing the torch to the next generation may be the easiest succession option, it doesn’t give you much liquidity. Selling your business outright is more likely the way to go if accessing maximum liquidity is what you’re after—but there are also many options in between (options that might better suit your goals, if you’re not ready to leave your business quite yet). A management buyout is an elegant solution to ensure your business continues its momentum, preserves your legacy and can also provide you with significant liquidity—but there are also debt recaps, equity recaps and leveraged buyouts, which all come with varying levels of control and liquidity.
Ultimately, how you choose to leave your business—and who you choose to leave it to—are very personal decisions. Decisions that don’t have to be settled with one “right” answer. There are many, many ways to achieve your desired goals and preserve your legacy. You just need the proper roadmap to help you uncover them.
The author is a Partner at Grant Thornton LLP (Canada). Grant Thornton International Ltd. is a leading global business adviser that helps dynamic organizations unlock their potential for growth. Punongbayan & Araullo (P&A) is the Philippine member firm of Grant Thornton International Ltd. For inquiries, you may direct them to 988-2288 ext. 760 or visit our website at grantthornton.com.ph
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