The heart of America’s economy includes millions of small businesses. As the owners of small businesses anticipate retirement or pass away, the ownership of the business must obviously transfer to someone else if the business is to avoid closing.
The change in business ownership can be a one-shot deal, which is common when a business is sold to people other than family or employees of the business seller.
When a business buyer is an employee or family member of the business seller, it is common for the business ownership process to be somewhat gradual so that the business seller’s relationships and experience can be fully and effectively imparted upon the business buyer. The outline of that gradual change in ownership is called a “business succession plan.”
Succession plans are not always formal and are not always in writing. However, regardless of the size or character of a business, the use of even a brief business succession plan can simplify the transaction and minimize everyone’s uncertainty.
If the business succession involves more than one seller or more than one buyer, a business plan is paramount to a successful ownership transition. Of course, when more people are involved, the business plan’s detail becomes more important.
Win-win business plans are designed to align (tie together) the business seller’s goals and the business buyer’s goals. Even if the business seller is contractually unable to compete with the business after the ownership change, the business seller almost always has relationships with the business’s customers, suppliers and competitors that the business seller can influence positively or negatively after the business is sold.
Thus, aligning incentives often involves some arrangement that requires the business seller to keep some “skin” in the business’s game for some period of time during the transition and sometimes for a limited time after the transition is completed.
Win-win business succession plans always include at least one indispensable component: an outline of the timeline of the transition. Of course, circumstances will change in the context of any forward planning, but flexibility can be included in the plan without eliminating the plan’s value.
Because business succession plans may include some period of shared/joint ownership to align incentives/motivations, the timeline should clarify whether the business buyer or business seller will be the ultimate decision-maker at any given time during the transition.
The succession timeline should also lay out the allocation of profits and losses during each month, quarter or year of the transition. Similarly, the timeline should lay out what portions of the purchase price will be paid to the business seller at what times. The timing of purchase payments affects taxes related to the transaction, especially taxes for the business seller.
Perhaps most importantly, a good business succession plan/timeline provides confidence in the business’s ability to cashflow during the transition and for a period of time thereafter. Of course, a well-written business plan that aligns incentives will make the business’s cashflow as important to the business seller as it is to the business buyer.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.