While retirement is typically the main reason for a business succession plan, other unexpected events can happen at any time. A proper succession plan ensures that your wishes are carried out and the business continues running in the manner that you envision. But, the key to successful exit planning isn’t actually about the exit – it’s about the planning.
While a vast majority of large businesses have a succession plan in place, it’s the small and medium sized ones that are oftentimes not ready to be sold. A 2013 survey by the Exit Planning Institute showed that 88% of business owners were not prepared to address succession planning and in most cases they were not even aware of their options.
A solid approach is to speak with a team of planners, including your attorney, banker, CPA, and perhaps even a business coach. Your CPA is going to work with you to get the business ready for a transition by acting as more of a consultant. The role is vital throughout the entire succession planning process and exit plan.
5 Reasons why you need a CPA on your business succession planning team, they will:
- Identify strengths and weaknesses early on to determine the best value for business
- Guide you throughout the process, making sure there are checks and balances
- Ensure financial statements are current and organized, leading to a smoother transition
- Compile pro forma statements based on specific assumptions and projections
- Review the most effective way to minimize the taxes on the transfer
When should business succession planning begin?
Typically, prospective buyers like to see a consistent performance over a three to five year period. But, it never hurts to start sooner so everyone knows what’s going to happen and what each person’s responsibilities are. More time also limits hurt feelings when the sale or transfer is staying in the family. We like to begin having recurring conversations with our business clients as early as five years before they plan to exit, but sometimes we’ll start as soon as we begin working together. Starting the conversation when the owner turns 65 is far too late.
Why 5 years is a good amount of time for a business succession plan
When the plan is implemented five years in advance, it gives you time to test the waters and see how things are going to ebb and flow based on the decisions you’ve made. As a business owner you have some questions you need to answer and having five years will help solidify your plans – you need a sense of what you’d like to do after the sale takes place, and family members need to be able to plan their futures as well.
When can a business succession plan fail?
The number one reason business succession plans fail is lack of preparation. When businesses aren’t planning in advance and being proactive, they’re simply opening the door for disaster. Too many business owners are putting the planning off, thinking they’ll handle things down the road, but there is really no reason to delay.
Proper succession planning and exit strategies require careful consideration and thoughtful preparation. While it may be difficult to think about exiting your business, it’s not unheard of to experience unexpected circumstances that can force owners to steer off course and pursue new ownership immediately. Whether you’re a baby boomer who’s coming up on retirement age, or you’re just getting started, small and medium sized business owners should take time now to begin thinking about a proper succession plan that will secure their financial future and protect their business for the long haul.
If you have any questions on how to get started or what you need to be thinking about, Steensma Accounting is here for you. Contact us today.
