Business Transition Planning

Technology is upending industries and disrupting business models – from professional services to construction.

It is also displacing business leaders and contributing to the "silver tsunami" – the wave of Baby Boomers predicted to transition out of nearly 4 million small businesses in the next 15 years.

Founders, who once might have stayed in their companies long past retirement age, are considering whether to evolve with their firms – or step aside.

Part of the uncertainty is the complex planning required for a successful business exit, said Patricia Hausknost, senior vice president and wealth planner at City National Bank. Studies show that fewer than half of business owners who ultimately cash out of their businesses have a transition plan that helps them unlock their company's full value.

“Even business owners who aren't ready to leave their companies need to start planning – at least a decade in advance – to transition out of their companies," she said.

Here are some questions she recommends to get clients started:

  • Do you know your company's current market value? If not, consider a professional valuation.
  • Do you want to completely disengage from your business in retirement or would you prefer to stay engaged but back off your day-to-day duties?
  • Do you need to cash out completely when you leave or are you planning to maintain full or partial ownership while someone else – such as a family member – manage operations?
  • What is your transition time frame?

The answers to those questions help steer a business transition plan in the right direction, Hausknost said.

They can also help assemble a team of expert advisors in areas such as business sale, tax and estate planning, financial advice and investment management. The team evaluates various transition options that fit the founder's goals and helps determine which ones will maximize the company's value and potential sales proceeds.

Those options may include:

  • A business exit: The owner ends his involvement in the business. Often, an exit involves business liquidation.
  • A business sale: The owner sells the business outright to a third party. The business owner may need to cash out of the company to fund retirement.
  • A business transition: The owner transitions the business to an insider, such as a family member, partner, manager or employee. This might mean leaving day- to-day management and business operations but retaining some or all of the owner's rights and privileges. Often, the proceeds are paid over a period of several years and the owner cashes out gradually.

No matter which strategy is chosen, the best value a business owner can reap from years of risk and hard work can be the options that emerge from a transition: Devoting time to family, hobbies, taking a leadership role at a favorite charity or even starting a brand-new business venture.

“Business owners can find a whole array of exciting and rewarding lifestyle choices available to them if they plan carefully and execute their exit strategies successfully," Hausknost said.