Leave a legacy through careful business succession planning

Business-partnership Established in 1854, Hilliard Lyons has worked with thousands of business owners to create a comprehensive road map that maximizes their return, ensures a successful transition, and ultimately provides greater control over their destiny.

Many business owners assume that planning for their eventual exit will mean the end of the company as they know it, but it doesn’t have to be that way.

While some entrepreneurs only want to cash a large check at retirement, many more are emotionally attached to the businesses they built by the sweat of their brows. Careful, advance succession planning can ensure the best outcome for both the soon-to-be-former owners and the legacy they leave behind, said Andy McKay, director of investment banking for J.J.B. Hilliard, W.L. Lyons LLC.

“Every business needs to engage in some type of business succession planning – from large, public companies to medium ventures to small family businesses,” said McKay. Hilliard Lyons works with a lot of family-owned companies, typically where a husband and wife lead the company and one or more of their children are actively involved.

Many of these business owners are so focused on short-term and day-to-day operations that they neglect long-term planning, he said. While every business and situation is different, McKay offers some key questions to consider.

What’s your legacy? Business owners need to think about what they want their business to look like when they’re gone. Do they want to maintain the status quo and continue operations under the company’s name? Do they want to ensure key employees are kept on the payroll?

Exit options could include bequeathing or selling to family members, selling to a third party, selling to employees via an Employee Stock Ownership Plan (ESOP), taking the company public, corporate restructuring, or selling to co-owners.

“We’re currently working with a group of owners who are selling to an ESOP,” said McKay. “They are going to get less for it than they could if they sold to a third party, but they are doing it for two reasons: the legacy of the business and the employees.” The owners want to make sure that the company isn’t absorbed into a larger business and that the employees, who have made the business successful, continue to prosper.

“Business transition is not always about money,” he added.

What is the goal of business owners after they exit? Retirement? Do they want to retain an ownership interest? Do they wish to sell and invest the proceeds?

“As an example, a business is generating a nice income of $500,000 a year for husband-and-wife owners, and they are looking at retirement,” McKay said. “They could sell the business for $3 million. The question is, are they better off to keep the business and build up its value over a few years, or sell it now?”

That depends on a lot of factors, he said. Selling may ease the owners’ tax burden with capital gains. It may mitigate future risks related to the business’ profitability. But it could also grow and generate additional income if the owners choose to hold off on selling for a few years.

What’s the value of the business, and what drives that value? In many cases, their business is the owners’ biggest financial asset, but they don’t spend adequate time managing its value, McKay said.

“Knowing the value of the business and what drives that value is very important to transition planning,” McKay said. “They also need to look at what they can do to increase that value.”

Factors that drive a company’s value include financial performance, cash flow, sales growth and the growth potential of their industry, solid middle management, and a plan in place for grooming future leaders.

Who’s on your team? To successfully execute a succession plan, business owners should surround themselves with a team of professionals. An investment banker can provide an initial business valuation, recommend value enhancements, and manage necessary transactions. An attorney can assist with overall estate planning and legal due diligence. A financial consultant can create a comprehensive personal financial plan, including retirement and insurance needs. A CPA can prepare financial statements and offer tax advice, and an insurance agent can help business owners understand and implement appropriate risk management tools.

Even the strongest team needs a quarterback, McKay said. “Somebody has got to lead the team. Any one of these professionals is capable. It’s up to the business owner to choose the right person for the job.”

When should planning start? McKay said that, ideally, business owners should begin with the end in mind, but that might not be realistic.

Selling a business can take six to nine months, McKay added. “Backing up from there, to make improvements in the business – clean up corporate records, settle any pending litigation, realign leadership, remove underperforming employees – this typically takes about two years. At a minimum, you need three years to plan succession, but I would advise business owners to start much sooner.”

The bottom line is that proper planning can ensure that owners exit on their own terms. Established in 1854, Hilliard Lyons has worked with thousands of business owners to create a comprehensive road map that maximizes their return, ensures a successful transition, and ultimately provides greater control over their destiny.

Hilliard Lyons Investment Banking utilizes a full-service model that brings "Wall Street" resources and experience to our "Main Street" clients. Give our Investment Banking Team a call today.