Lengthen Your Runway
You may believe you have a long runway. But business owners face challenges when they plan to stay in their business forever. Even if that is your plan, creating an ownership transition plan can increase cash flow, business value, and performance. It can also give you long-term options â€“ which I call â€œlengthening your runway.
â€œYou fall to your highest level of preparation.â€ Georgetown MBA class slogan
Letâ€™s discuss some of the specific challenges you can address with planning:
Challenge 1: Business Risk
Keeping the business indefinitely subjects it to long-term risks. As we have seen recently there can be politically motivated change such as tax and trade policy, economic downturns or structural changes within the companyâ€™s business or industry. It may be difficult to make constant business adjustments to deal with the fast pace of a changing business environment, as you age.
If you plan to stay in your business forever, poor health can affect your personal performance and this can affect the performance of your business. You probably rely on your business for financial security. Additionally, business owners who never want to plan for succession often feel no need to delegate responsibilities to others. This can negatively affect your financial security if you ever become ill or seriously injured and canâ€™t run the business at full capacity.
Challenge 2: The Short-Runway Syndrome
If you plan to stay forever, the only thing that will affect your time in the business is death or permanent incapacitation. However, if you choose not to plan for your succession you actively sacrifice your free time for the sake of the business. If you ever reconsider, you may find that you donâ€™t have enough time to adjust and fulfill your wants. A change of heart or health can leave you without anything to do or live for if you havenâ€™t planned for it. I call this the short-runway syndrome.
Challenge 3: Tax Consequences
Because of the step-up in tax basis and high estate-tax exemption, owners without an Ownership Transition Plan typically face minimal tax consequences. Moreover, since you havenâ€™t planned for an ownership transition, your business probably isnâ€™t worth much. Paying taxes is usually better than being in a situation where you donâ€™t have to.
Challenge 4: Legacy
You may have goals for your ownership transition such as benefiting employees and the community, or maintaining the legacy of the business and charitable giving. These may be difficult to achieve unless advisors work with you to plan for an inevitable transition. This includes preparing the business to run well without you. If you on your presence for your success without an Ownership Transition Plan your business can quickly falter and even fail. If you have goals outside of â€œwork until you die,â€ youâ€™ve made yourself vulnerable to unanticipated events that can harm or destroy your business.
Challenge 5: Successor
If you choose to stay forever and are the go-to person for all business decisions, you expose your business to the risk of dying with you. If you see no need to delegate company responsibilities, any harm that comes to you can transfer to the business, employees and clients.
The challenge is to have management succession planning in place before the ownership transfer event occurs. This insulates the company from risk because successors know how to keep the company running. Ownership Transition Planning connect directly to estate planning, so neglecting an Ownership Transition Plan can mean that estate plans suffer as well.
Addressing These Challenges
The obvious way to overcome the challenges of having no Ownership Transition plan is to start Ownership Transition Planning. While many business owners who initially decide not to plan tend to think they have to do everything on their own, thatâ€™s not true of Ownership Transition Planning. There are many tools to minimize or eliminate the challenges in no-Ownership Transition Ownership Transitions. These designs and tools focus on achieving all of your goals and aspirations.
Keep in mind that the actions required to mitigate the challenges described here may take years. Business owners typically wait to begin planning to transfer ownership of their companies until they are ready to leave. When owners have decided never to leave, you should ask yourself about the consequences of a premature death or long-term illness. What would you do if something happened to your spouse? After all, preparing a business for your leaving due to death or incapacitation, and ensuring the ownerâ€™s family continues to benefit from business ownership, requires the same preparation and focus on growing and preserving transferable value, and selecting a capable successor, as does an Ownership Transition guided by your pre-determined departure date.
A little planning can lengthen your runway and increase the chances of a smooth landing for your business.