It’s been said that “every journey begins with a single step.” As a business owner approaches the future, the same can be said. When faced with the daunting task of making decisions about the future direction of their business and ownership interest, many owners become paralyzed and delay planning. They may become overwhelmed with the options, or more likely, realize they haven’t taken the time to wrestle with their long-term goals for the business, their ownership or their personal life.
Proper planning takes time, so it’s a relative certainty that if you set a course long before you leave your business, you’re more likely to achieve your goals. Regardless of the final path chosen, the initial planning inputs are the same, so you can make significant strides even as you’re “working out” your dreams, goals and desires for the future. We encourage owners to begin the planning process by considering the following planning inputs.
Target Departure Date
It’s important to have a target date in mind, as this sets the priorities and orders all strategies and tasks to be done. Whether that timing is two or 20 years, you can’t create a road map for success without a stated departure date. You can design your own departure in terms of when it occurs and how your involvement with the business changes and evolves. If you can’t visualize a future different from today, this likely is your starting point. This date may change as business opportunities present themselves or obstacles occur. But you must have a target date to make headway.
Preliminary Lifestyle Needs Assessment
This isn’t a financial plan, which contemplates investment recommendations. Rather, the lifestyle needs assessment helps you assess and set your financial and personal objectives. It helps you determine how much money you must receive from the transfer of the business—in concert with your other personal assets—to achieve your personal financial goals. This includes retirement income needs and wants, and may include generational gifting or charitable pursuits. This input is critical in determining the design and timing of a transition.
Owner’s Desired Successor
To focus your transition plan, you must decide your first choice for successor, as well as consider a viable “Plan B.” The good thing is the list of possible successors is limited to include the following:
- Child/children or other family members
- Key employee
- Unrelated third party
- Employee stock ownership plan (ESOP)
There are advantages and disadvantages to each choice. An owner can’t typically see the pros and cons of each possibility because they’re too close to the action. You may want to sell to a specific successor, regardless of the downsides. This could spell disaster. Therefore, we recommend seeking outside, unbiased input.
Preliminary Valuation of the Company
Many owners will use hearsay and incomplete information to value their companies. This self-determined value could be significantly higher or lower than the real value, causing owners to either expect too much or sell short. A preliminary valuation of a company, prepared by an appropriate professional (CPA or CVA), provides you with a fairly good idea of how much your company is currently worth. Knowing company value improves the likelihood you’ll receive full fair market value when you leave. The valuation also tells you how much business growth is required to meet your ultimate financial objective at the departure date.
Future Cash Flow Estimate
Successful business owners are experts in running their enterprises. However, their experience in accurately forecasting cash flow may be limited. A sound estimate of future cash flow is critical to planning. And, if you have a long runway, the name of the game is to focus your energy in pursuit of growing cash flow. A professionally prepared cash flow forecast can help you assess the likelihood of success of various transition paths. It also helps prevent the plan from running into dead ends and establishes financial credibility. This is of the utmost importance if your choice for successor is a third-party buyer. It’s also important if your transition contemplates a gradual transfer of ownership to an insider, such as a family member or key employee.
We’ve highlighted these five inputs because they’re typically where we start when working with owners to define their plans for the future of their business and ownership interest. This finite list is simple enough that it can help even the paralyzed owner begin to move forward.
As a full-service firm, BKD has the experienced advisors to assist you with each area along the planning process. For more information, contact Chris or a BKDnext® advisor to discuss your situation.