Strategies And Tactics Of Ownership Succession
Roger Lockwood had two careers; his first was as a professional baseball player in the 1960s. After retiring from baseball, his second career started when he founded his own materials distribution company.
Roger was successful in attracting customers to his new business because of name recognition from his first career and because of his business smarts. His company grew, and by the mid-1990s, revenues approached $20 million.
However, Roger had some concerns. His grown children were not interested in the business, and his wife wanted to spend more time with him, pursuing travel and hobbies. Personally, Roger decided he was tired of bearing the responsibility for his company and was at a crossroads–what path of ownership succession should he take?
Rogers situation (his profile has been changed to protect his privacy) parallels that of all successful entrepreneurs. Owners dont live forever, so strategies and tactics must be devised to execute a successful transition. Unfortunately, it seems the deck is stacked against the entrepreneur; its estimated that only one-third of companies successfully transition to a second generation of ownership.
But, when business owners carefully evaluate the available exit strategies and work with experts in the field (lawyers, business valuators and insurance professionals), a successful transition can be made.
Before determining potential tactics of ownership succession, business owners need to do some soul searching and consider themselves, their family, money, employees, and taxes. These business owners must answer some difficult questions, such as:
1) Do you want out completely? Would you like to stay on as long as possible, but with reduced responsibility?
2) Do you want the company to be a legacy for your children? Are your heirs capable of running the firm, and if not, should they continue to own stock in the firm?
3) How much money do you need from the business to make personal retirement comfortable? Is that amount feasible if you want to walk away from the firm?
4) Is the management team capable of successfully running the firm? Should they be given the opportunity?
5) What will Uncle Sam take from any transaction? What tactics can help minimize the amount paid in taxes?
Business owners have a number of options to execute ownership transition, which we will consider here.
Outright sale. Probably the most obvious choice is to sell the company, pay taxes on the sale of the business and move on. It should be noted that third-party sales can have some strings attached (usually an employment contract for one to three years, an escrow account for potential liabilities at closing, and potential payouts over time through a seller note), but they can represent the simplest exit route for an owner.