VMM managing partner Joseph Milizio, head of the Business and Transactional division and the Exit and Succession Planning for Business Owners practice, was invited by the New York State Society of Certified Public Accountants (NYSSCPA) to discuss the legal aspects of exit & succession planning for businessowners and executives in their journal, Tax Stringer.
This article is the second part of a three-part series on succession planning. Part I, by VMM partner Morris Sabbagh, focued on estate planning and estate & gift tax planning. Part III, by firm colleague Steven Goodman, will focus on Financial Planning.
The article can be read here and below.
The Success in Succession, Part II: Business Planning
By Joseph G. Milizio, Esq.
Published Date: Sep 1, 2024
This article is the second in a three-part series on succession planning. Part I discussed the legal considerations in creating an exit or succession plan, including estate planning and estate and gift tax planning. Part III will focus on financial planning.
As a business owner or a professional representing a business owner, planning for the future of the business is crucial. Exit and succession planning are integral components of a robust business strategy, safeguarding a delicate phase in the business lifecycle, ensuring a smooth transition when the time comes, and providing valuable peace of mind.
In this part, we’ll focus on the business considerations, including how to avoid the mistakes business owners and executives often make in preparing for exit or succession.
To help you keep track and ensure you’re addressing all your goals, you can separate your plan into six steps:
- Identify your exit objectives.
- Quantify your business and personal financial resources.
- Maximize and protect your business value.
- Transfer ownership to insiders or third parties.
- Safeguard business continuity.
- Preserve personal wealth and create a comprehensive estate plan.
None of the following is meant to provide definitive answers, as they differ for every person. But it should help you formulate the right questions for you and your business.
1. Identify Your Exit Objectives
The first step in exit planning is to define your goals. All too often, business owners establish goals that are vague or unrealistic. Ask yourself:
- When do I want to exit the business? Establish a clear timeline (even if flexible) that aligns with your professional and personal aspirations.
- What do I want to achieve financially? Consider your lifestyle, retirement plans, and any other financial needs or commitments.
- Who will be my successor(s)? Determine if you want to transfer ownership to a family member, key employee, sell to a third party, or some combination thereof.
- What legacy do I want to leave? Consider how you want your business to continue after your departure.
2. Quantify Your Business and Personal Financial Resources
It’s vital that you make a thorough assessment of your financial situation. This involves:
- Business valuation: Have a qualified appraiser prepare a comprehensive business valuation. This includes assessing tangible and intangible assets, revenue streams, market position, and growth potential. Doing this early will also give you time to improve your valuation.
- Personal financial review: Evaluate your personal finances, including-but not limited to-savings, investments, and retirement funds. Calculate, in as much detail as possible, how much money you need to sustain your desired lifestyle post-exit.
- Financial gap analysis: Identify any discrepancies between your business value and your financial goals. This helps you understand if additional growth or adjustments are necessary before exiting.
3. Maximize and Protect Your Business Value
To attract potential buyers and secure a favorable deal, you need to maximize and protect your business value. There are many ways to do this, but don’t overlook the basics:
- Enhancing operational efficiency: Reevaluate and look for ways to streamline processes, reduce costs, and improve productivity.
- Strengthening market position: Increase appeal to buyers by constantly working to differentiate your business and offer the best service, building a loyal customer base.
- Diversifying revenue streams: Reduce dependency on any single source of income. Even for CPAs, there are different ways to develop new services, enter new markets, and retain new clients.
- Documenting systems and processes: Ensure all business operations are meticulously documented and can be easily transferred to a new owner. For example, financial records, contracts, standard operating procedures, and employee manuals, are some of the essential systems and processes to document. .
- Risk management: Safeguard against threats by investing in robust risk management practices, including insurance coverage and legal protections.
4. Transfer Ownership to Insiders or Third Parties
Your exit objectives and the nature of your business (sole practitioner, small or large firm, etc.) determine the best method to transfer ownership. The common options are usually:
- Family succession: If you’re passing the business to a family member, be sure they’re prepared and capable of taking over. Even if they already work for you, this may still involve specific training and increasing their responsibilities. In this type of transfer, you will want to transfer at the lowest defensible value possible.
- Management buyout: Selling the business to key employees can be an attractive option. But first make sure they have the financial capability to purchase the business, which is often done through the earnings from the business.
- Third-party sale: Selling to an external buyer often (usually) yields the highest financial return. As business savvy as you are, consider engaging a business broker or investment banker to find the right buyers for your business and negotiate the best terms.
5. Safeguard Business Continuity
Ensuring your business continues to thrive after your exit is critical and part of your legacy. You want the house you’ve built to keep growing, especially if it continues affecting you or your family’s financial wellbeing. Consider:
- Succession planning: Make sure your exit or succession is comprehensive and tailored to you, detailing the transfer process, roles, and responsibilities. Communicate this plan to all stakeholders to ensure transparency and buy-in.
- Leadership development: Invest in the development of future leaders well ahead of your exit. Provide training and growth opportunities to ensure a strong leadership pipeline.
- Contingency planning: Prepare for unexpected events by having contingency plans in place. This includes emergency management strategies and a clear communication plan.
- Client and vendor relationships: Maintain strong relationships with key clients and vendors. Ensure they’re aware of the transition and confident in the continuity of service and quality.
6. Preserve Personal Wealth and Create a Comprehensive Estate Plan
Your business exit plan should go hand in hand with your personal plan. Be mindful of the various legal aspects involved in distributing assets, preventing dissipation of assets and preserving personal and family wealth, maximizing benefits and exemptions, controlling your business after succession and even death, and other matters.
For more information, please see Part I of this series.
As a business owner, exit and succession planning are critical aspects of your business strategy. They require thoughtful consideration and proactive steps. Start early and approach the process with the same dedication and foresight that have made your business a success.
Joseph Milizio, Esq., is the managing partner of Vishnick McGovern Milizio LLP, where he heads the business & transactional division and the exit & succession planning for business owners practice. He can be reached at jmilizio@vmmlegal.com and 516.437.4385 x108.
