Top 10 Questions to Ask Before You Pass Your Business to the Next Generation
If you are thinking about retiring, selling your business, or passing it along to a trusted friend or family member…your head is probably spinning with hundreds of unanswered questions. Where do you start? How do you begin? When will you know you are ready? Which way should you go?
Well, look no further. We have helped countless people navigate these tricky waters, and I have developed a list of the top 10 questions you need to ask yourself (and really, truly answer) before you sell your business. Ready? Let’s go…
Who will be the next owner?
The first thing you must know is whether you want to pass the business on to your children or if you want to provide for them in a different way. Sometimes we think we want to sell it to Junior but selling to a 3rd party is actually better for mom and dad in retirement. Try and look at this objectively and consider what is best for the business, what is best for you, and what is best for your kids before you decide who the next owner will be.
Can we afford it?
One important thing to consider is how much you need to retire, and how that needs to be structured into the sale of the company. When you consider what it is truly worth, can your successor afford to buy it? Do you really want to provide a discount that would put your retirement in jeopardy so that Junior can take over? Or would a third party that can afford to pay what it is worth be best for everyone?
Will it be a burden?
On a related note, will selling the company to Junior for what it is worth put him into hardship? If so, he (or she) will probably not be able to focus enough on the business itself and it could put the company at risk. You may be worried they will resent you if you do not pass the business along to them, but what if they (and the business) end up in bankruptcy because the true costs weren’t considered?
Can they do the work?
If the finances aren’t an issue, it is important to understand if they are able to do the work. Are they actively engaged in it? Do they know the nuance of the day to day, the customers/employees/vendors/big picture? If they are not running it independently now, how long will it take for them to get there? You need a plan for their training and leadership development to get there before you can really think of passing the business along.
Are they prepared to go the distance?
The problem is most family businesses fail because the second generation isn’t prepared to handle the responsibility. Think back to the guts, sacrifice, and drive it took to get your business where it is today. If you didn’t love it like it was your child too, would you have worked as hard? If the next generation thinks it is easy, they are in for a rude awakening when things get hard. If they aren’t 110% committed and don’t have what it takes…what will happen to the business? There is a critical step before you get there – coaching, training, leadership (see question 6).
If not, when will they be ready?
Make sure this is done in advance, it cannot wait. I have a hard truth coming here, so prepare yourself…if you want to retire next year, you can’t. Timing and consideration of their leadership ability is really important. Until you can check the boxes on those two things, until they are standing on their own two feet and there is a strong leadership team, you cannot retire. Once you know when they will be ready, are they willing to put in the work to get there…and can you wait that long?
Can the business survive the transaction?
Selling a business is a delicate balance. The sale price needs to meet the needs of the founder, the ability of the next generation, and the projected income the business needs to pay its obligations. The transaction can’t be a burden to the next generation because when the going gets tough they will get out and sell it at a discount. (Trust me, I’ve seen it far too many times.) You need to make sure the structure of the transaction meets the needs of both generations and the entity itself. Decide what you want/need from the business to support your lifestyle in retirement. If you overburden it, the organization will be too weak to perform and the next generation won’t be able to keep things afloat and thriving into the future.
What about the tax implications?
Oh yes, there are tax considerations and implications related to this process. They are pretty significant, and this question is usually the one that brings people to involve us in the planning process. If you make the wrong choice the ramifications can be detrimental to the founders so that their cash flow is diminished and they can’t live the life they want. You need two to three years of planning to make sure you have it all well thought out and planned for. (Yes, I said two to three years.) You may need a change in structure, ownership, to develop contracts in a different way, and so many other things. Lots of planning can go on behind the scenes (and we can help), but much of it takes time. This is especially true now because of the Tax Cuts & Jobs Act – you must evaluate and plan for tax ramifications before you can retire and pass the business along.
Will you continue to be involved?
If so, in what capacity? Consider what you really want and what is best for the business, the new owner, the customers, and more. If the dream is to completely retire, make sure the business is ready for you to be absolutely gone. If you are planning to continue to work in a reduced capacity, make sure that is known and prepped for as well. How long will that last and when will the business be ready for you to be fully gone?
When is the right time?
Notice I didn’t say “perfect” time, because (as with so many things in life) there is no perfect time to retire and sell/pass along your business. However, there is a “right” time to pull the trigger and actually step aside. Many of the answers to these earlier questions will help you know (for example, if Junior needs two years of leadership coaching and you need two more tax seasons to pass, you can use that as a guide). Some things can overlap (like those two examples) but some have a causal relationship, where you can’t start one until the other is complete. Keep all those factors in mind when picking your retirement date.
While there are a lot of things to consider here, hopefully this post helped your brain to stop spinning and the plan to come into focus. You have marching orders – a direction. And, my biggest advice? Do not do this alone. You need an objective 3rd party, someone you can trust, to help you through all the nuance. It could be your current accountant, but if they are not an expert in this area, you need to hire someone else. The future of your company is just too important to be left to hopes and good intentions. You need someone who has been there and can show you the way. Yes, we would love to be that for you, but above all, I want you to find someone to help you through this even if it is not us. You can’t afford not to have help. Trust me. If you do want to chat about this and see if we are a fit, send me an email any time.