It can be difficult to plan for your replacement and deal with your mortality, which is why many Maine business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. However, there are many reasons why it’s best to make a proactive plan.
Here are five of the top reasons why business owners don’t have an exit strategy.
Reason Number 1: No Time
Business owners get caught up with the everyday tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done … later.
Why this thinking is wrong: When put off for too long, the outcome may be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And as we all know, “later” may never come, which would be the worst case scenario. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.
Reason Number 2: Loss of Control
There are times when a business owner may not want to stop working for the companies they spent years building. Giving up control is difficult, and owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.
Why letting go is a better approach: A proactive approach brings more control over the end result. The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success.
Reason Number 3: Ignoring Tax Issues because they are Complex
The most tax-efficient way to structure a succession transaction depends on the company, the parties involved, and when you sell (federal capital gains rates may increase in the future). There may be several ways to structure these transactions, but tax implications of a sale or transfer can be extremely complex.
Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run, not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax adviser well in advance of the actual sale.
Reason Number 4: Not Sure Who Is Going to Take Over
For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?
In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the “heir to the throne” have the business skills to succeed? Will a formal succession plan cause family conflict?
Without all the answers, a business owner may do nothing.
Why this is a mistake: Without a solid plan and exploring the possibilities, you leave the outcome to chance. And the company you spent years building could cease to exist. There are many options for ownership transfer, such as selling outright, sell to your children, gift interests to family members at a low tax cost, and more.
Reason Number 5: Not Enough Retirement Savings
Many Maine business owners put off making adequate contributions to retirement plans while building their businesses. The result may be insufficient savings. Where is income going to come from during retirement, especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.
Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.
The final advice would be to start well in advance. These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Assemble an advisory team that includes your corporate attorney, accountant, estate adviser and other professionals.
And if transfer your business to your children, urge the next generation to start thinking about their succession plans as well!