Creating A Business Transition Plan

April 19, 2024

A carefully designed business transition plan can facilitate proper succession and a lasting legacy. The process requires multiple considerations on the part of the business owner. Through the guidance of specialized commercial banking wealth experts, owners can optimize their business succession planning effortlessly for the most fulfilling experience.

Ideal business exit planning ultimately passes the company into the right hands while providing owners with personal rewards and a sense of accomplishment. In addition, a structured business transition plan eliminates fears of the unknown in post-business life by redefining personal financial priorities.

Business people sitting at a desk reviewing charts, data, and creating a business transition plan

What Happens With a Lack of Business Exit Planning?

Business owners must face the eventuality of handing their company to another party. The lack of a solid business transition strategy brings many practical risks that compromise an owner’s efforts and contributions. These risks may lead to an accelerated loss of business control under unfavorable circumstances.

For example, the sudden loss of a business partner or an owner’s untimely passing could disrupt business continuity planning and lower organizational performance. Therefore, business exit planning equates to securing an owner’s culmination of hard work and carefully considering personal and professional goals.

Assess Critical Factors for Business Transition Plans

A business comprises multiple areas linked with its owner’s lifestyle and continuity, where a single decision can create a financial chain reaction. As such, it is necessary to identify each goal in an exit strategy, and how, put together, they provide a seamless and fulfilling outcome. Therefore, a comprehensive business transition plan may have several key considerations.

Business Continuity

Owners must assess the company landscape and performance as it would appear under a new leader. A business transition plan accounts for leadership succession and the steps senior management requires for a successful handover. In addition, owners may consider implementing compensation plans to reward long-service staff for outstanding contributions. These rewards can help foster team morale and boost the company’s long-term value for buyers.

Post-Sale Lifestyle

Many business owners face significant cash flow changes from a business sale. Therefore, it is necessary to consider the financial implications of the exit strategy alongside tax-related issues related to the shift.

Also, since most owners find their business inseparable from their identities, they should channel the money from a sale to a similarly purposeful replacement. These may include starting a new venture, undertaking philanthropic work for a target community, or supporting loved ones through various financial vehicles.

Estate Planning

A thoughtful business transition strategy is integral for estate planning as it affects the valuation and discounts involved in asset distribution. For example, owners must include factors like estate tax implications to provide a fair market value for their business. Similarly, business exit planning can calculate minority interest and a lack of marketability discounts to assess estate planning accurately and reduce overall taxes.

Optimizing Business Succession Planning

Positioning the most sellable business depends on the owner’s corporate, personal, and financial goals. Also, deciding between selling a company to a family member or a third-party enterprise is essential. Both alternatives require meticulous planning to ensure an undisrupted handover.

When considering a family inheritance, the owner should determine the specific roles of each appointed member and the deciding criteria, such as seniority and experience. In addition, a clearly laid out business transition strategy avoids conflicts arising from the business transfer.

Selling a business to external buyers requires a different approach. For example, owners need to highlight the immediate financial returns of the purchase or how the acquisition aligns with a buyer’s long-term growth strategy.

Make the Sale

A quality business transition strategy should also consider the sale method, which affects income tax rates and the overall outcome for all transactional parties. For instance, selling the company’s stock for cash or promissory note passes liabilities to the new owners.

On the other hand, an initial public opening (IPO) allows owners to remain company shareholders, but doing so reduces ownership by dividing the stocks among public buyers.

An effective business transaction plan should also prioritize buyer concerns to make the most attractive deal. These include federal income tax (with differing best practices among buyers and sellers) and earn-outs. Earn-outs occur when buyers and sellers disagree on a fixed sale price and base a part of the transaction on post-sale company performance.

Consider the After-Sale Climate

A sound business transition plan should consider the company landscape after a sale. With careful planning, owners ensure a smooth transition for themselves, fellow shareholders, and employees, thus preserving a company’s standards and reputation.

Planning an exit strategy with the end in mind can help optimize business performance and reduce the risk of future operational complications. A thoughtfully crafted exit strategy can also help maximize buyer perception and trust, ultimately improving selling prices. When in doubt, owners should lean on the expertise of professionals like investment bankers and lawyers to help them navigate the complexities to reach their desired goals.

Final Thoughts

First Western Trust offers a sophisticated and personalized approach to commercial banking for managing all your business exit planning needs. Our seasoned experts provide the resources and industry knowledge to help you plan the most comprehensive exit strategies that maintain a lasting legacy.

Schedule an appointment with a First Western consultant to discover a business transition plan aligned with your priorities.


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