Exit Planning for the Family Business

Transcription

1 August 2018 White Paper Exit Planning for the Family Business What is business exit planning? Business exit planning is the process of gaining freedom from your business. Whether your intention is to transfer your business to your children, sell It to key employees, sell to a competitor, or just wind it down, having a plan in advance improves your opportunity for success. When the business owner fails to plan, even the most successful business can become a liability to the owner or to his or her heirs. A recent report of closely held business owners found that: An overwhelming majority of business owners (94%) do not have a formal exit strategy in place. This is slightly greater than the previous year s report (92%). Of those that do not have a formal strategy or exit plan, 48% were sole owners and 52% had 2 or more owners, indicating that the number of owners does not necessarily impact the importance of developing an exit strategy.* Building Industry Association of San Diego 9201 Spectrum Center Blvd., Suite 110 San Diego, CA For more info, please contact Lori Asaro, SMC President Phone: GoSMCSanDiego@gmail.com membership/smc

2 Do you have a formal exit plan or strategy? 6% Column1 94% 94% of business owners do not have a formal exit strategy in place. NO YES 1s Q 2nd Q WHAT ARE THE BENEFITS OF HAVING A PLAN? A well designed plan can help the owner to achieve a variety of goals depending on his or her specific situation and objectives. For example, an exit plan may allow the business owner to: Monetize value that is locked inside the company Gain personal freedom from the day-to-day obligations of running the business Share the responsibility and rewards of ownership with key employees or family members Reduce gift, estate and income taxes related to any transfer of ownership Maintain family harmony Preserve a legacy via business continuity 2

3 What do you consider as critical or important steps to a successful exit strategy? In surveying business owners regarding the steps considered as critical or important to a successful exit strategy, business owners felt that grooming a successor is a top priority. Developing a Written Succession Plan was also identified as a significant step in the exit planning process.* Developing a written succession plan 24% 47% Grooming a successor 22% 62% Hiring a new successor 5% 39% Discussing exit plans with family who are not in business 20% 35% CRITICAL IMPORTANT Seeking financing for new buyers 3% 38% Obtaining a business valuation 11% 38% Hiring a broker/investment banker to see the business 0 19% 0% 10% 20% 30% 40% 50% 60% 70% B A THE EXIT PLANNING PROCESS Business owners need to ask themselves: After all of the effort I ve put into building my business, what will I ultimately be looking to get out of it? Once this question is answered, factors like retirement age, family considerations and specific financial goals begin to take shape. There are many tools to help individuals get into business, but few to help them get out. The exit planning process is a customized, comprehensive approach to designing a business owner s successful exit from the business and incorporating unique personal objectives into realizing his/her desired outcome. Without an exit plan or strategy, the likelihood of maximizing financial return, minimizing tax liability, preparing for contingencies and realizing a successful transition from the business are greatly diminished. To mitigate the risk of a negative outcome, owners need to allocate more of their time in developing a comprehensive business exit plan that takes into account retirement goals and objectives. 3

4 TO BEGIN THE EXIT PROCESS, OWNERS SHOULD CONTEMPLATE THESE KEY ISSUES: Business valuations Buy/Sell agreements Grooming successors Identify retirement income needs/goals Golden handcuffs for key employees Initiating stock programs to key executives Implementing business growth strategies and cutting expenses Delegating owner responsibilities to management and employees Preparing audited financials for the business for prior years Getting pre-qualified for financing Writing a comprehensive summary of the business Consulting advisors on how to structure the deal and potential tax exposure Structuring buyouts from successor or partners Identifying the potential universe of buyers 4

5 BUSINESS OWNERS IDENTIFIED MULTIPLE OBSTACLES EXIST THAT IMPEDE THE EXIT PROCESS. In surveying business owners, 87% of business owners indicated that not knowing how to start was an obstacle. Lack of Financing for Purchase by Employees was identified as more of an obstacle than previous years (75% to 77%).* Lack of management candidates internally Lack of financing for purchase by employees Current value of business won't meet retirement goals Business hasn't reached potential Hesitancy to address potential conflicts Lack of qualified buyers Too busy focused on growing the business Don t know how to start 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% SIGNIFICANT OBSTACLE Series 1 Series 2 SOMEWHAT OF AN OBSTACLE WHEN IS THE RIGHT TIME TO BEGIN PLANNING? Business owners are busy running day-to-day operations and for many, their identity is so closely tied to their business that it s difficult to imagine leaving. For those reasons, many haven t prepared for, or even contemplated, their exit. But not planning for their inevitable exit comes with many risks. To preserve your options and equity, remember that time is of the essence. Don t wait until you re ready to leave to start exit planning. No matter how long you ve been running your business, the evidence is clear that owners should start the process earlier to map out their exit. Engaging in the exit planning process early on, potentially 5 to 10 years before you are ready to exit, can help you to see your options, identify and resolve problems, get your business in order and ultimately maximize its value. 5

6 Business owners may want to stay in business longer because of the recent strong economy and growing financial markets. 1 year 2-5 years 6-10 years 11+ years Not sure 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% WHEN DO YOU PLAN ON EXISTING YOUR BUSINESS? Tax & Financial Group has found that most business owners are looking to exit their business in the next 2 to 10 years (78%). Almost half say they are looking to exit their business in the next 2 to 5 years (43%). Compared to previous years those who have said they were looking to exit their business in one year slightly decreased (8% to 2%). Those are Not Sure also decreased compared to prior years (16% to 8%). * DON T WAIT TO HAVE THAT VERY IMPORTANT CONVERSATION WITH AN APPROPRIATE FINANCIAL PROFESSIONAL. There are several tools to help individuals get into business, but very few exist to help owners exit their business smoothly. The exit planning process is a comprehensive approach that is personally tailored to the needs and goals of the owner to achieve their desired outcome. A successful and smooth exit usually takes time to complete. Therefore, owners are better off planning well in advance rather than towards the end of their career. Business owners owe it to themselves and their families to at least begin the process 6 * Tax & Financial Group Report of Closely Held Business Owners: The Exit Planning Process, 5th Edition 2017

7 Meet the author 69% Stephanie Hughes Financial Strategist License # 0I98528 Tax & Financial Group 5720 Oberlin Drive Suite 138 San Diego, CA Toll Free: Office: Direct: Fax: Stephanie.Hughes@tfgroup.com Stephanie received her Bachelor of Science Degree in Liberal Studies with a Major emphasis in Spanish and Minor in Chemistry and Pre-Medicine Studies from the University of California at Riverside. Stephanie 90% holds the Series 7, 63, and 65 registrations, Life and Health Insurance Licenses, as well as variable life and annuity licenses. Stephanie is a Registered Representative and Investment Advisor Representative of Securian Financial Services, Inc., member FINRA/SIPC. Stephanie is fluent in Spanish, and has many professional achievements; one most noted is being awarded the Rob Roy Integrity Award from UCR in She is a member of the Building Industry Association of San Diego as well an active member of the Southern California Trade Association. She has taken a particular interest in the Women in Biosciences organization in San Diego and supporting women business owners and entrepreneurs. SUBSCRIBE Marketing and Events We re looking for experts like you! Have a whitepaper you d like to share or write for the SMC? Contact our president Lori Asaro at smc@biasandiego.org and provide your name, contact information, and subject matter for consideration. Don t worry about formatting, we ll do that for you. Write about something you know. It should be educational, but still engaging. 1,000 words is ideal for this purpose. Provide citations if referencing other material. Provide links. Add pictures. Provide a Bio and your picture. Designed by Capstone Studios, Inc. Let us inspire you to build a brighter, better career. JOIN TODAY For more info, please contact Lori Asaro, SMC President at smc@biasandiego.org 7