When the succession planning process begins, business owners often start to consider who should buy the company. However, it first is important that owners understand what they want from the transition.
For Construction Pros says before exploring exit strategies, business owners should ask the following questions that drive transitions.
- How much cash will I receive at closing? The amount of liquidity available significantly influences the financial plan. There are different opportunities and risks involved; there can be financial security when an owner receives most of the purchase price at closing, while deferred payments over a period of years require more careful planning.
- How much of the deal is contingent or at risk? Some deals may include factors where payment to the owner depends on the business hitting certain goals after the sale or where a senior lender—such as a bank—will be the first to receive payment. It is crucial to understand how much of the purchase price is secure so an owner can determine his or her financial situation.
- What role will I have after closing? Some owners may want to immediately move on while others may want to be involved for months or years as advisers, executives or minority owners. An owner’s continuing involvement can be a vital part of the agreement, so the financial plan should reflect how an owner plans to spend his or her time after the transition.
- What taxes will be triggered and when? Taxes can significantly affect the amount of wealth ultimately available after a company is sold. It is important to understand transaction structures and their various effects so owners have more time to prepare for tax outcomes.
- Do I want to diversify my net worth? Because many construction business owners spend years reinvesting in their companies, much of their personal net worth often becomes connected to a single asset. An owner should consider whether his or her wealth remains tied to the business or should be balanced across other investments.
- What do I want this wealth to accomplish? Is the wealth creating retirement income? Will it be used to support children or grandchildren? Will it be given philanthropically?
Knowing the answers to these questions can help company owners more easily determine which transition structure is best for them.
