Comerica Insights: Business Transition Planning: Understanding Your Options

All business owners will face a business transition event. Among the most important decisions a business owner will make is when to transition the business and how to implement the business transition plan to accomplish both business and personal wealth planning goals. 

Questions to consider:       

• Do you intend to retire from the business while remaining majority owner?
• Do you know what will happen to the business if you died or became disabled today?      
• Do you have a plan for succession of management and control?
• Do you have children who currently work in the business or who intend to enter the business?
• Do you intend to sell the business to a third-party strategic buyer when you no longer wish to manage the company?
• Do you or the business have sufficient liquidity to facilitate a seamless transition? 

Only you can answer these questions. However, by collaborating with your team of financial and legal advisors, you can develop and implement a cohesive plan that addresses not only your responses, but also takes into consideration your transition options.

Transition Options

Assessing your transition options requires planning for the predictable transition events, while also planning for the unforeseen events. The first step is to understand your business transition options. 

The most common business transition alternatives include the following:

• Sale to Third Party During Your Lifetime. If you wish to sell your business to a third-party, the sale may arise from diligent pre-sale and retirement planning or may arise from an unsolicited offer. In either case, you should retain a qualified business appraiser to value your company using valuation methods most appropriate for your type of business.       
• Sale to Co-Owners, Management or Employees. If you have co-owners, you and your co-owners may enter into a buy-sell agreement to sell some or all of your business, now or in the future, upon the occurrence of one or more events. Or, you may wish to transition your business to Key Employees or Management via a buyout agreement.
• Lifetime Gift or Sale of Business Interests to Family Members. If you have family members involved in your business, you may gift or sell voting or non-voting interests to them directly or to a trust for their benefit. Transfers to family members will require you to decide (1) who will control the business, (2) who will own the business, and (3) who will manage the business.     
• Gift or Sale at Death of Business Owner. If you do not wish to transfer your business during your lifetime, you may execute estate planning documents that direct your executor and/or trustee either to sell the business or have designated individuals continue the business. 

Conclusion

Wealth Planning for business owners is inherently more complex than planning for non-business owners because closely-held business assets are often the most dynamic and valuable assets on a business owner’s financial statement. As such, preparation for a business transition event requires coordination among your personal and business advisors to balance ongoing daily operational considerations and long-term strategic objectives to ensure you achieve your personal wealth planning goals. 

Assessing your business transition options should start by working with an advisory team to conduct preliminary due diligence of your business to:

1. position your business to extract as much after-tax value as possible from a sale to a third party, co-owners, or employees
2. identify the most operationally and tax-efficient methods for transitioning business interests to your family during your life or at death.
3. assess your cash flow and retirement income needs, including a review of your personal financial statement, your pre- and post-sale income and expenses, income tax obligations, and risk and liquidity profile.  

By following a disciplined approach to your business transition planning, you will enhance the likelihood of closing the sale, minimize taxes and ensure the sustained viability of the business following the transition event and position the business to provide maximum benefit to all stakeholders.

-Jeffrey Quijano, National Director-Wealth Planning

Comerica Wealth Management

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