Business Succession and Transition

By: Scott Becker

Our clients know that we provide traditional tax and accounting services for our clients.  While we enjoy helping our clients navigate the increasing complex compliance issues that businesses face, we truly make a difference for our clients when it comes to the higher level challenges faced by businesses today.   The HBE Consulting Team takes on a wide variety of issues for our clients ranging from human resource issues and data analytics to business valuation and financial planning.  This article will hit on the key considerations of business succession and transition planning.

We believe the business succession planning process should start four to five years before the date of the planned exit of an owner from a business.  During this time period, it is important to really dive deep into the planning and analysis process. The rest of this article hits on the keys for planning for succession and transition by asking a few “who, what, where, when and how questions”.

Who?  Who are we selling to or transitioning to?  Is it a key employee, family member, or an outsider?  This is sometimes the most difficult part of the process as prospects for succession may be limited. Other times, the number of prospective buyers are great and a plan needs to be put in place to find select from several choices for the best fit for the business’s future success.  There are both financial and non-financial considerations to the “who” question.  The financial part often relates to financing a buyout and how to make sure the transition is structured in the best possible way for the seller while ensuring the buyer is put into a position to be successful.  The non-financial considerations can make or break a deal. Carefully planning over the pre-transaction time period makes a big difference in the future success of the business transition.

How?  How to value the business?  How to maximize the value?  Our HBE team includes four Certified Valuation Analysts (CVA).  We analyze the business to determine the value of the business based on general principles of valuation.  Typically, this includes assessing the value of the business using three basic approaches to valuation:  income approach, asset value approach, and a market approach.  Once the value is determined, we can then talk about ways to work to maximize the future value of business along with ways to increase business profitability.  Business valuation is both an art and a science.  The art part of the valuation process is about understand the business beyond just the numbers.

What?  Is the future transaction a gift or sale?  How to structure the transition and succession?  Once the buyer is determined and an approximate value is determined, the structure of the transaction is considered.  Ideally, the overall succession process starts well before the transition is set to happen.  Time spent with this area early in the process can be helpful to the buyer and seller.  If a family member might be a future owner, the transaction may involve gifting of ownership interests.  There may be tax reasons to begin gifting sooner rather than later.  Our team helps clients work through these issues during each phase of the succession process.

When?  When will this happen?  The right time for a transition is usually based on the business owner’s personal goals.  Starting the conversation early helps get the buyer and seller of the business in the same page earlier rather than later.  This generally helps in the success in closing the transition.  However, it is also necessary to start soon rather than later if the original sale and transaction plans fall through.

What are the tax considerations?  The overall goal for a seller is usually to maximize the after tax cash flow.  If we are working with a buyer, we strive to make sure the value, structure, and overall plan sets up the client for success.  This is the area of the process in which our clients typically think of calling their CPA.  The interesting thing is our team can usually make just as big of impact in all the other planning areas as well.

Overall, we recommend getting the succession and transition plans started as early as possible.   A plan needs to address the considerations listed above and needs to be flexible to meet the needs of both the buyer and seller of a business.  Our HBE Consulting Team is available to help you start down the road in this process, and we look forward to continuing to help being a part of the succession and transition solution.

Submit a Comment

Your email address will not be published. Required fields are marked *