Consider a long-term deal for your succession plan
Independent business owners are just that: independent. They are the decision makers and success drivers. So what happens when the business owner starts thinking about retirement? Many baby boomer business owners are grappling with that question today. They may not be ready today, but the sooner business owners plan for this inevitable fact the easier the transition will be for everyone. And if there isn’t someone in line to move to the leadership role, what do you do?
One potential solution is to find an outside buyer for your company and undertake a long-term deal to gradually cede control to them. Going this route can enable a transition to proceed at a pace which both buyer and seller agree.
Selling your company gradually
For privately held businesses, long-term deals typically begin with the business owner selling a minority stake to a potential buyer. If the buyer is a business owner and plans to combine the two businesses, this option provides a trial period to assess the two companies’ compatibility.
The parties may sign an agreement in which the minority stakeholder has the option to offer a takeover bid after a specified period.
In addition to defining a succession plan, this scenario may provide needed capital to fund improvements such as:
- Hiring additional staff,
- Paying down debt,
- Funding research and development, or
- Expanding facilities.
After all, by leaving a company you’ve nurtured in excellent shape, you’ll enjoy a fulfilling retirement knowing your legacy will remain successful.
What’s in it for the buyer?
This type of deal is attractive to buyers because a minority-stake purchase requires less cash than a full acquisition. This helps buyers avoid finding outside deal financing. It’s also less risky than a full purchase. Buyers can, for example, push for the company to achieve certain performance objectives before committing to buying it.
Integration may also be easier because buyers have time to coordinate with sellers to implement changes — an advantage when their IT, accounting or other major systems are dissimilar. In addition, in a typical M&A transaction, decisions must be made quickly. But under a long-term deal, the parties can debate and negotiate options, which may improve the arrangement for everyone.
The best deal depends on you
Succession planning comes in as many varieties as ice cream. A gradual sell scenario is just one of many strategies and it may be right for you. Our best advice is: Don’t’ go it alone. We can help you design a succession plan that fits your individual needs. Another bit of advice, when it comes to succession planning, plan early, so you have time to weigh your options. Contact Dan Hout-Reilly, CPA, CVA, Ciuni & Panichi, Inc. Senior Manager at 216-831-7171 or by email here for sound advice for your business.
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