Business Succession Planning: Contemplating Selling Your Business, What Happens Now?

You built a successful metalworking manufacturing business, worked long and hard, and now it is time to pass the reigns to a new owner and enjoy the fruits of your labor. So, what comes next? How do you prepare for the sale and what does life look like post-sale? Will the sale proceeds provide for you comfortably through retirement or will you return to work? Perhaps you intend to use the sale proceeds to invest in a new business venture? If transferring the business to the next generation, will you stay on in some capacity, and what does that look like for you in terms of cash flow?

These are all questions you need answers to and why it is so important to reach out to your team of advisors to map out a plan before committing to a sale. Planning with your financial advisor, tax advisor and estate planning attorney both pre and post-transaction will be crucial.

Corporate Structure

Of course, there are many other items to consider, starting with the way the business is structured.

• What is your corporate structure? How about your tax structure?
• Do you hold a whole or partial interest? Is your interest comprised of both majority and minority positions?
• Have you had the business appropriately valued for sale? Is there an existing buy-sell agreement in place?
• Is there any life insurance associated with the buy-sell?
• What form of cash flow will the sale proceeds provide to you: lump sum, take back a loan, principal and interest payments, or a combination of those or other methods?

Cash Flow Analysis

When running the business, you could project your take home, which allowed you to manage and plan for your personal financial affairs. Once the business is sold can you adequately fund your lifestyle? Have you done a cash flow analysis?

Looking at income and expenses both pre and post-transaction will allow you to set goals, budget spending and influence your investment and spending habits and trends.

• Are there large ticket items the business paid for that you will now have to pay for out of pocket – such as health insurance, life and disability insurance, vehicle expenses?
• Did you take a salary and/or distributions throughout the year and how will you supplement that income moving forward?

Wealth Transformation

For years investing in your business and the management of its fiscal health has been where you concentrated your efforts. Now it is time to shift your focus to your own financial well-being and that of your family. This business, your largest asset, and one that is almost wholly illiquid, will soon be a liquid asset.

• What are your goals for the wealth this liquidity event will provide?
• How will it be invested? What kind of cash flow do you need it to generate?
• What is your risk tolerance? What kinds of investments are you comfortable with?

These assets must provide you with the means to accomplish your goals, so close collaboration with your advisory team is essential.

Maintain Family Harmony

When we transition business interests to a family member it is usually to one child who has remained interested and/or involved while one or more have gone in the pursuit of other interests. But sometimes we intend to transition a business to family and they have no interest in carrying on the business.

The best way to ensure the continuity of a family business, if that is the desired result, is to have a strategy for its continuity. This requires thoughtful planning and discussions, with all family members, both those who wish to remain involved and those who do not.

And yes, sometimes this can create tricky family dynamics when not all parties wish to remain involved, trickier still when parties believe mom or dad may be playing favorites or leaving more assets to one or more siblings, making it even more important to thoughtfully plan.

Post Transaction Estate Planning

Just as it is important to develop a plan for the management and investment of the sale proceeds, so too will be revisions to, or in some cases the development of, your estate plan.

• Do you have a last will and testament and a revocable trust in place? Do you have incapacity documents (health care documents and power of attorney)?
• Does the language of those documents need to change now that you do not own the business, did you have a separate durable power of attorney for your business that you will not need now?
• Have you made provisions for your children and grandchildren?
• Has your vision for the legacy you wish to leave behind changed in light of this liquidity event? Is gifting to your children and grandchildren now or soon part of your plan?
• Are the appropriate estate planning vehicles in place to facilitate and optimize the transfer of wealth to the next generation and strategically use your gift and GST exemptions?
• If you have given or sold the business to one child, do you wish to provide for equalization of other assets to your other children in your estate plan and/or gift other assets to other children now?

Pre- and post-transaction planning is an essential part of the business succession process and should start months and sometimes years before the sale and often carry on months and sometimes a year or two after the sale. Assembling your trusted team of advisors is key to yielding the best results for you, your business, and your family.

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