SBM Articles


When It's Time To Go...

by Mark J. O'Donnell and Jim Schmersahl

You will not own your business forever; leaving is inevitable. The key question is not if, it’s when, and then how. It may happen in one (or more) of four events.

1. Orderly transfer of ownership to the family
2. Sale to a third party.
3. Death or disability
4. Disaster (financial failure, litigation, bankruptcy, divorce, etc.)

Any change of ownership has many issues, including company finance, customer retention, management succession, income and estate tax, legal protection, family wealth, etc. This article is an overview. Our intent is to get you started or cause you to review your plan with a bias toward action.

The first two of these events, Orderly transfer of ownership to family and Sale of ownership to a third party, are controllable (unless they happen because of death or disability). Both offer the potential for a satisfactory transition but require at least a few years of preparation to financially position the company effectively. Let’s start with Family Transfers.

The critical action is determining if your family member is willing and able to be an effective owner. There are as many important variables here as there are families. The business may be owned by you, you and a sibling, you and other nonfamily minority owners, etc. Start with a meeting with the ownership group to determine what they want to have happen. You need their buy-in for company success. They may wish to buy you out (keeping it in the family but not your direct family).

Meet with your own immediate family, especially if you have multiple children. Some may be in the business, some may not be but wish to be, all may currently have other careers and still want the opportunity to be the successor. You may also have several children in the business; it falls to you to establish the roles, responsibilities and rewards for each child. Involving your family in the succession decision is also vital to helping avoid resentment between “the chosen” and the “not worthy.”

Be sensitive to the impact of passing over the firstborn in favor of a more qualified sibling (or cousin). Be aware of their own family needs and commitments, as well as their compensation expectations. The business has to be able to afford their compensation for their new role, so they have to find a way to add value. A quick way to sow the seeds of unhappiness within your company is for the kid-future boss to be overpaid and underperforming.

It is never too early to identify and start grooming your family successor. Recognize they aren’t you; they have their own strengths and weaknesses. They may also need additional education, although real-life experience at your side is worth more than any class.

Start involving them in aspects of the business that may be foreign to them; do involve them in your meetings with your CPA to expose them to the exciting world of business finance!

We haven’t even touched on business valuations/buy-out and buy-in considerations; that is another article.

Mark O’Donnell, CPA, is Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727. Jim Schmersahl, CPA, is a Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727.

Submitted 28 days ago
Categories: categoryFinancial Fitness
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