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updated: 10/18/2017 12:16 PM

Business ownership succession planning

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  • DANIEL COMAN

    DANIEL COMAN

 

We are in the midst of the largest generational business ownership transfer the United States has ever seen. Many business-owning baby boomers are starting to yearn for retirement. They have seen many business cycles, and the Great Recession of 2009 is still a recent memory. Many see the current mild business expansion as an opportunity to perhaps transition some of the burdens and perhaps more fully enjoy some of the benefits of a lifetime of work.

Business owners are notorious for deferring this type of planning until it is too late. Many are blinded by the mythic notion of the lone wolf entrepreneur who succeeds against all odds due to his or her own personal grit and determination. Although such attributes no doubt play a part in overcoming the sometimes brutal competition and risk taking necessary to succeed in the marketplace, the simple truth is we are stronger as a team than any one person could ever be by himself or herself. Part of recognizing that simple truth is recognizing when a business ends or is severely crippled due to the loss of its founder, that is due to that founder's failure to plan for an orderly succession that can carry on when the founder is no longer willing or able to do so.

So what is a business owner to do? The answer, of course, is to develop a clear vision, distill it into a plan, and then act on it.

Every business is unique, but when faced with this issue, there are a series of possible outcomes (some good, some bad) that can either be chosen or foisted upon the business owner due to his or her lack of timely decision making.

Internal Transitions

For some businesses, the obvious option is an internal transition either to the next generation in a family business or a senior management led buyout of current ownership, sometimes using an ESOP to finance the transaction. The key to internal transitions is to determine if there is sufficient strength of leadership to carry on the business without the current ownership. It is also important to realize that sometimes the first person chosen does not work out for any number of reasons. If current ownership's time frame is too short, then a failure in this strategic initiative with the first candidate can lead to a crisis.

External Transitions

External transitions usually involve a full sale of the business. Another option becoming more broadly available is a partial sale to a third-party private equity firm who intends to grow the business and then resell it for a larger price. This potentially allows the current ownership to take some of its "chips off the table" and yet still participate in a second transaction potentially getting "two bites at the apple."

The most typical private equity strategy involves acquiring several smaller businesses in the same industry niche, eliminating competition in the process, and using the increased economies of scale to improve buying power and significantly expand the resulting business' profitability. The combined operation is later sold to take advantage of both higher profitability and higher enterprise value multiples.

By understanding private equity purchasers, business owners can position their companies to fit into such a strategy and achieve an attractive exit strategy. Alternatively, some business owners themselves become the strategic acquirer so they can capture the economic benefits of scale and ultimately facilitate their own exits in a highly profitable manner.

Liquidation

The option of last resort is to liquidate the business. This is a tragedy that not only results in financial losses to ownership, but also leads to good people losing their jobs and customers and suppliers being meaningfully inconvenienced or outright damaged.

Conclusion

As is true in many things, a failure to plan is often tantamount to a plan to fail. This is particularly true with planning around ownership succession. Having a team of experienced legal, tax, and business professionals who have assisted others in such planning and have worked through all of these scenarios in the real world is profoundly helpful. An experienced team will allow one to avoid the many pitfalls to which others have fallen prey, while maximizing the many opportunities that do exist.

• Daniel G. Coman is a partner at the law firm of Ice Miller LLP and can be reached at (630) 955-4257 or at daniel.coman@icemiller.com. This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.