The Four Ways To Transition Your Business
People think business succession is complicated, and I suppose it is, but sometimes we make it too complicated. There are actually only four ways to transition a business.
What are the four ways? One way is to close the doors. Some people have a lifestyle business. They run it for a number of years. They make a pile of money, and one day they shut the doors and walk away with their wealth and they sail off into the sunset. This is not a valued judgment. That’s okay if that’s what you want to do.
Now, for those of you who want your business to continue, that option you can scratch off because closing the doors doesn’t make sense if you’ve got a really viable business going. If the business is bigger than just you and your personal services, then that probably doesn’t make sense, especially if you want your kids or grandkids or nieces and nephews to be in the business.
The number two alternative, which lawyers and CPAs and financial planners might tell you to do is, “Make it a gift.” It used to be $20,000 a year that you give to your kids or could give to anybody for that matter, and then you can give away unified credit. You could give away the family business over the course of four, five, or 10 years and get it out of your estate and not pay any estate taxes.
Why would you give away a valuable business? I’ve never understood this personally, because why would you give away a valuable business to your young people just to avoid estate taxes? People value things they pay for a lot more than things that they’re given. So, giving away might work depending on your circumstances, but it also may not work depending on your philosophy and circumstances, as well.
The third alternative is to sell it. Sell it to insiders, specifically. Insiders could be your kids, or it could also be your non-family key executives within the business. Most business transitions go to someone outside the family. Maybe the kids are not interested in running an auto repair shop. They want to be college professors or they want to be monks in Tibet. Selling it to insiders, whether it’s family or non-family, is a very viable option, and one that’s really on the rise, too.
The fourth alternative is to sell it to outsiders. Sell your company to some big Fortune 500 company. Sell it to your rival across the town, whatever it happens to be. Now, a lot of folks think that they’re going to wake up one day at 65 years old and they’re going to sell their business, and they’re probably not. Less than 1%, maybe less than one-tenth of 1% of small closely held businesses get sold to a bigger entity in any given year. It just doesn’t happen. Why is that? Well, to be very blunt, most of you don’t have anything you can sell. The business is so dependent on you or a tiny handful of people that it’s really not a viable going concern, and it’s not really sellable.
So, let’s take things off the table, realistically speaking. Closing the doors. That doesn’t make sense for most of you. Giving it away – your lawyer and your CPA and your financial planner might want you to do that. Maybe that makes sense, maybe not. Philosophically, I struggle with it.
The fourth alternative, selling it to outsiders. That just statistically doesn’t happen very often. You might have a pipe dream that you’re going to sell it to an outsider, but it’s probably not going to happen. Where does that leave you? Well, that means selling the business to either insiders, and probably 90% of the shops that we work with go with option three.
Now, having said that, there is one other alternative, and that’s some combination of the four. You could shut down an unprofitable division. You could give away real property to your kids. Maybe they become the landlords of the business, and then you could sell a piece of it to family insiders as well as non-family employee insiders. So, you could use a combination of the four, but outside a combination like that, these are the only four ways to transition a family business.