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Transitioning out of a business is typically a once-in-a-lifetime event, so most business owners lack some knowledge about the process. Misinformation and myths that surround this important event can sometimes contribute to unfavorable succession outcomes.
Goal setting, advance planning, and the right advice can put a business on track for a successful transition. The effort invested in succession planning is well worth it, since company viability and financial security are usually tied closely to a solid succession plan.
Strengthen your succession planning and likelihood of a smooth transition by reviewing the following myths.
Reality: A succession plan involves financial planning, employee management, tax strategy, and many other complex tasks. While there is no exact right timeframe for starting your planning, it’s safe to say that earlier is better. For example, in many cases the process of retooling company financial forms to put your company in the best possible light for a handoff or sale can take a few years.
A review of some of the tasks involved in succession planning may help you see how far in advance you should begin:
Talk with your tax or financial advisor to start your planning.
Reality: Selling your company to a third party might sound like the most attractive choice, but depending on a variety of factors, it might not be your best bet — or even an option at all. For instance, a business that is heavily reliant on an owner for continued success is not a good candidate for a sale. Likewise, companies that lean on one or a handful of customers for profitability or that are in industries undergoing consolidation may also not appeal to potential buyers. Other factors that can negatively impact the feasibility of selling your company include being in a declining industry or holding too much debt.
If you find that selling is not an attractive or viable route, you can make changes to your company to make it more appealing to buyers. Adding to your customer base, involving others in day-to-day operations, paying down debt, and diversifying your offerings can all help. You can also look into other options for an exit strategy that are more gradual, such as creating an employee stock ownership plan (ESOP). Handing a company over to a family member is another option, if you have a relative with the interest, aptitude, and skills to step in.
Reality: Many small business owners plan to fund their retirement or next career move through the sale of their company. In many instances, though, the actual value of your company may not match your expectations. Data from BizBuySell shows that the average sale price for a small business is $200,000.
Speak with your financial advisor to gain a better understanding of how much your business may fetch if it’s sold. If it’s not the price you were hoping for, identify ways to increase your company’s value and create a timeline for achieving these goals.
Reality: All aspects of your company will be in play during succession planning. Therefore, you need a broad base of support. While a business broker may be key to helping you understand market conditions and how best to promote your company for sale when the time comes, much of the planning beforehand requires additional expertise.
Since financial forms, business improvements, and debt are all central to succession, your financial and tax advisors will be essential advisors. For example, your financial advisor can help you determine how succession factors into your overall financial plans, while an accountant will advise you on the tax implications of various decisions. An attorney is also an important part of any succession team, since he or she will be sure all legal regulations and paperwork are properly handled. Your attorney can also flag any current legal obligations that may impact your plans. Having independent advisors is important so you are given the needed advice and feedback that often does not come from family members or people involved in your business.
Reality: Some owners may be hesitant to jump into succession planning because they believe it is synonymous with walking away entirely from the company they’ve built. However, there are several succession strategies that provide a way to remain involved while making changes to company ownership.
For example, a sales agreement can stipulate a gradual exit for you during which you contribute to company management. You can also serve as an advisor or board member to contribute to company operations while relinquishing control of daily management. An employee stock ownership plan (ESOP) also provides a gradual means of handing over ownership.
When and how you exit your business will be among the most important decisions you make as a business owner. Your business banker can be a starting point for gathering the information and guidance you need. Your banker may also be able to point you toward other professionals who can help you through the process.
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