Who is next?

Business transition does not start with a "for sale" sign

In my family, only my great-grandfather had the experience of starting a store from the ground up. While only my great grandmother and their five sons were around in the early 1920’s to watch, G.W. Brown left the employment of a store across the street from the location where our first family business was located.

While none of those first two generations are alive to talk with me about it, I anticipate my great-grandfather was like most business owners; when he first opened the business the thought of retiring or selling the business was not at all on his mind. We jokingly say my great-grandfather had the greatest retirement plan in having five children.

Surely, someone would want to succeed him in the family store. And that is what did happen; three of the five did go into business. One opened his own store some twenty blocks away and two succeeded my great-grandfather, although eventually my grandfather bought out the brother that had joined him in the succession.

Somehow, that managed to work as the family business continued. This is where we insert the disclaimer like what you see in automobile and motorcycle advertisements on television; “do not try this stunt at home”. Do not try this with your own business.

Compared to what great-grandfather did, there should be some type of game plan to every business. When you are starting a business, we envision it like opening a door and entering a room or experience. At the same time there should be thought given as to how you are going to walk out of the room and close the door on that experience of your life.

Reading this magazine, we expect you have already made it through the first part. Today, regardless of what stage of business life you are in, we are suggesting you begin to think about the last part.

Leaving the business, you have several options; close the business, sell it to an outsider, sell it to employees, transition the business to a family member. It is not that you must make your choice today, but you do need to think about how you are getting out of the business regardless of when it will be.

One of the benefits of owning the business is the expenses and deductions you can have as an owner that the average individual does not have. Simple examples include having your business provide you with a cell phone, automobile, insurance (life and health) and even allow you to hire your children as compared to giving them an allowance. The result of these is paying for them with pre-tax dollars as well as diminishing the tax liability of your business; you wind up with more dollars in your pocket.  Your business does not look as profitable, but since it is your business, it matters only to you.

When you come to that day you decide you want to leave, the day of transition needs to be several years later. This is to allow you to clear up and take out of the business those expenses we just described. For the sale, the buyer is going to base their offer on the profitability of the business. You want your business to be as profitable as possible.

The transition to a family member is a bit more complicated; especially if that family member has been a part of the business. The challenge is you are selling the business to the very person who has helped you build the business. Their work has helped you grow the value of the business. At the same time, these efforts work against them. We will offer a suggestion which is what my parents used. They looked at the value of the business on the day I joined the business and again on the day they left the business. Half of the increase in value over those years, was credited to me as a “down payment” for the purchase of the business. It was fair to them, to me, and to my siblings.

We have offered just a few quick glimpses of what you need to think about. But definitely you cannot wake up one morning and hang a “for sale” sign. You’ve got some planning to do.

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