A business owner can retire in several ways. Each has implications, not only for you as the owner, but for the business and the business adviser.
In order to retire, you as an owner can:
allow the business to cease – particularly if the business is small and closely tied to the owner’s personal involvement
sell the business
allow existing partners or family to run the business and maintain a passive involvement
take a new partner and retire from active involvement (or scale down involvement)
transfer ownership and control of the business to family members
appoint a manager.
Each option has its merits and drawbacks. However it is essential that any decision regarding retirement be made early so that death or infirmity does not force an unfortunate decision on the owner or the owner’s family.
What are some of the issues that are raised by the retirement options listed above?
Assets: as pensions are assets tested, ownership of the business could have a significant impact on pension entitlements.
Further security: the money obtained from selling the business could be safely invested to provide future income security.
Liability: owners and silent partners can be held liable for debts incurred by the business, eg, a director who lets a manager run the company may still be personally liable for debts incurred by the company.
Responsibility: it may be difficult to leave a business which has been nurtured over the years and this can lead to worries in retirement and make it difficult for management or remaining partners to effectively run the business without interference.
Death: owners deciding to retain an interest in the business, then his or her family may be left with a problem when the owner dies, as often the owner may be the person best qualified to decide what to do with the business interest.
The other aspects of retirement which should be provided for are superannuation, life insurance policies and estate planning.
No matter whether the ownership or only management is being passed to another, you as the owner must plan for succession.
Selling the business
Sometimes a business owner might decide to sell his or her business rather than hand it to the next generation. Selling the business as a means of retirement has several advantages.
Once the business is sold, the owner no longer needs to worry about it and this can be a relief in retirement. As retirement approaches, the owner may feel that he or she would like to remain involved with the business, but that feeling may change as the years go by. If the owner decides to sell the business interest later, he or she may not get the good deal he or she would get while still personally involved.
When a business is sold on retirement the proceeds can be safely invested in a way that will ensure a sustained income for the remainder of the owner’s life.
Another consideration is that pensions are assets tested which means continued ownership of the business could have an impact on the owner’s entitlement to a pension. The funds from the sale of the of the business could be invested in a way which would minimise this problem.
One complicating factor in selling the business is that it may be difficult to sell without the involvement of the owner. For example, if there is no professional management in the business, the purchaser will be likely to want the former owner to stay on and operate the business for a fixed period of time.
The eventual purchase price will often hinge on the former owner continuing past successes. If this can be planned for, it need not be a problem. However, if retirement is forced on the owner, the sale price could be so adversely affected that passing a going concern to children might be a better option.
Leaving family or partners to run the business
If a business owner wishes to retire, but does not want to end his or her involvement with the business, he or she might leave a family member or a partner running the business. This has the advantage of continued involvement without the responsibility of dealing with the day-to-day problems of running the business.
However, there are some negative sides to such a scheme. The first is the practical consideration that many people will find it difficult to step back from a business that they have nurtured over the years, and leave decisions to others. If they fail to step back, then they are not really retiring and the family member or partner may become dissatisfied and frustrated.
Equally, many parents will find it difficult to properly assess their children’s management capabilities. A professional appraisal of both the potential and existing capabilities of the children should be carried out. This will benefit both the children (who should not be made responsible for something which is beyond their capabilities) and the parent (who may still be relying on income from a successful business).
If the business is to be run by remaining partners, it must be remembered that the partners actually running the business will probably want a greater share of its profits. At the same time, the retiring owner will want to maintain his or her lifestyle. A compromise must be found between the two points of view.
Another consideration is continuing liability. If the owner continues as a partner or director he or she may become personally liable for debts incurred by the business, even if he or she had no knowledge of the debts.
Transfer to the owner’s family
Where the owner chooses to take no further part in the business, and transfers ownership and control to his or her family, there are three basic considerations.
First and most difficult, the owner must accept that he or she no longer controls the business. Most people do not want to face difficult decisions, and handing over the reins of a venture that the owner has built, nurtured and controlled over the years can be the most jarring move that an individual has to make in his or her professional life. Yet if the change of control is to be successful and the business is to continue to prosper, it is essential to effectively plan and assess the situation.
Second, the owner must identify the potential problem areas in the transfer of ownership. Do any family members have both the aptitude and interest necessary for running the company? If more than one family member wants to take over, how should the takeover be organised and how will the family members work together?
Third, retention of outside professional help is strongly recommended to strip away the layers of emotion that surround the transfer of a family business. An objective adviser can be the key to resolving disputes and ensuring that the decision made is the best one for both the family and the business.
Appointing a manager
Some of the problems associated with appointing a manager are similar to those found in leaving family members or partners to run a business. Care must be taken in setting the manager’s:
level of managerial autonomy
Often it will be necessary to offer the manager some equity in the business so that he or she will have a personal stake in its success. This may be particularly important if it is intended to pass the ownership of the business to children and install a manager. The children may not have the knowledge or interest to ensure that the manager is honest and is doing a good job. If the children have some aptitude for business but lack the time or interest to run it themselves, a mandate should be clearly established. Such an arrangement should recognise both the manager’s responsibility for day-to-day operation without interference and the family’s right to make policy decisions.
Management succession planning is one of the fundamental roles of the owner of a business. There are two primary responsibilities in this regard: (1) selection and grooming of a successor; and (2) determining those factors which are most essential to managing the company in an effective and efficient manner to facilitate continuing growth and development.
The options available in terms of naming a successor or leader include:
choosing among family members
forming a committee structure of family members
selecting a manager from outside the business or
selecting a key employee to run the business.
There is no one correct selection method, however the following should be kept in mind:
the nature of the business
its life cycle stage
qualifications and abilities of family members and
expectations and capabilities of senior executives.
|Management Succession ChecklistAs well as selecting a successor for proper succession management; the owner must impart that information which he or she deems most crucial to the future of the company. This communication can take both written and oral forms. At a minimum, areas of concern which should be addressed include:
financial statements, profit and loss statements, cash flow charts
tax returns for the past five years
banking information, including the names of the company’s bankers, lines of credit, current bank accounts and average balances; and
insurance information, including companies, agents and types of coverage
partnership agreements or corporate records
patents, licences and royalty agreements
employment and labour agreements
pending lawsuits and copies of all existing contracts and leases; and
names and addresses of lawyers, accountants, consultants and any other outside professionals retained
Operations and technical data
an inventory of major equipment
process and scheduling procedures
quality control measures and standards used to gauge performance and
a brief appraisal of the efficiency of plant and equipment currently used
lists of products and/or services and their selling points
present and proposed advertising programs and
profiles of competitors
an outline of basic procedures for buying; and
inventory status and shortages
standard operating procedures
statements of a company mission
Ownership succession is the other side of management succession. As it is important to provide for the ongoing, capable management of the business, it is imperative to place active ownership in the hands of those interested and capable of providing future direction, input and support to it. Multiple classes of shares and shareholder agreements can be used to match the specific objectives of family members with their rights to ownership prerogatives.
Some specific techniques which can be employed include:
Separating ownership from management interests
– if the business is a company, different classes of shares can be issued to children not in the business which entitle them to dividends but not voting rights.
Directing or restricting subsequent share transactions
– the succession plan (or estate plan) can include provisions to deal with a family member’s desire to sell his or her shares. Specification of the mandatory buy-out of the shareholders’ interest, either through redemption or requirement to sell the shares, is a standard approach to handling this type of situation.
Limiting the outside investor’s purchase of shares
– by using an agreement giving the family or company the right of first refusal before any shares can be sold, the business owner can significantly limit the opportunities for outside investors to purchase an interest in the company.
|Ownership Succession ChecklistThe following checklist applies to both succession and estate planning as many of the issues raised are similar.
What role has the surviving spouse (if any) to play in the arrangement?
Who will take over management of the company on the owner’s death or retirement?
Is he or she suitably qualified?
Is he or she suitably interested?
How do employees and other family members feel about the choice?
Who will acquire control of the voting shares on the owner’s death?
Will the value of the business be greater if the owner sells before retirement?
Will the owner’s lack of involvement materially affect the price if the owner wishes to sell later?
Is there any concern about sons-in-law or daughters-in-law acquiring an interest or control in the business?
Has any manager been given equity in the business?