By C. Joseph Ciccarello, CPA, MST
Gray, Gray & Gray, LLP
If you have built a flourishing chain of businesses over the years, your life has no doubt been focused on operational and financial issues related to the business. But it is essential that you also pay attention to your personal finances. In particular, you need to ask yourself how you will “cash out” the equity you have accumulated in the business and capitalize on the legacy you have built.
This is a complex question, since the value of your company has likely increased substantially over time, and in particular may have risen steeply during the recent economic recovery. Does the succession plan you put in place years ago take into account all the changes in the business, the market, and your personal situation that have occurred? A plan that may have worked for the owner of a small, struggling business is almost certainly inadequate for the CEO of a multi-unit chain with millions of dollars in annual revenue.
First, let’s look at why now is the time to address a strategy for an exit that may be several years away. As a business owner you have invested time and money in building a thriving operation. Your portfolio may be extremely concentrated, with the majority of your assets lying within your business. But now you are in a position to diversify a bit, able to spread your risk, optimize your portfolio and even grow your assets through a wider range of investments. That requires extracting the equity that may or may not be readily available.
Is your company’s balance sheet strong enough so that the business can begin to pay you back now, before your retirement? If not, is the company in a position to approach a lender in order to borrow the money for your distribution? The answers to these questions have a profound impact on future equity distributions as well.
Whether you take a partial distribution now or wait, have you figured out what you will do when the time comes to leave the business? If your plan is to pass the business along to the next generation and have it remain in the family, you need to determine if the best way to accomplish that is through a sale, a gift, or a combination of both. Will you make the transition while you are still working? Wait until retirement? Or keep a tight grip on the business until your death?
If family succession is not an option, you’ll need to consider other opportunities. Many business owners reward loyalty by selling the business to their employees through an Employee Stock Ownership Plan (ESOP). But you need to be sure that you have put a stable and reliable management team in place to continue the business, or risk losing your equity as revenue and income falter. A better choice might be an outright sale of the business to another organization, or even a competitor, which can result in an immediate influx of cash.
The decisions you make and direction you take should ultimately be influenced by the maximum value to be derived from a sale, ESOP, or combination sale and gift made to family members. While it may be important to keep your business alive and operating, your primary concern must be ensuring you have enough money to live the life you want once you walk away, and to sustain that lifestyle throughout your life expectancy.
Investing the time and money now to create or update a plan for your eventual exit from the business will pay huge dividends when that day finally arrives. For more information on how to successfully manage a business succession, please contact Joe Ciccarello.
Joe Ciccarello is the Managing Partner of Gray, Gray & Gray, LLP, a certified public accounting and business advisory firm with headquarters in Canton, MA. (www.gggcpas.com)