Whether public or private, successful businesses share some of the same concerns. Attracting and retaining talent, balancing growth and risk with profitability, and adapting to economic changes are all key issues. But the owners of private businesses face unique challenges, particularly when they decide to make changes in the ownership or management of the business.

What does the owner want his long-term relationship with the business to be? Answering this question can be one of the most important — and difficult — questions of a lifetime. Some business owners may want to retain ownership but scale down their role in day-to-day operations. Others may seek to sell their businesses, externally or to internal partners.

Owners of family businesses often intend to pass on their companies to the next generation. Whatever the case, the issues surrounding these “living transitions” are often highly complex. The best solutions are holistic and focus on the long-term needs of the business owner, integrating business, personal and financial issues into a comprehensive and executable plan.

Creating a Plan for Business Transition

Business Transition

Living transition planning is designed to keep a business as profitable and valuable as possible when ownership changes hands, thus maximizing returns to the owner. It is not death planning. Most owners already have in place a contingency plan to provide for family and business. They often fail to prepare for the more likely scenario that they will enjoy a full lifespan and at some point want to redefine their relationship with their businesses.

Creating a living transition plan involves a complex matrix of personal, financial, family, managerial and legal issues — not to mention the emotional challenge of change. Business owners must consider whether they want to give up control of their business. If so, how much control, when and to whom? How will the transition affect their financial security, given their anticipated lifestyle? They also must think over the impact of transition on the strength of their business and the effect on any shareholders or employees.

Effective transition planning balances the concerns of both the business and the owner. In the case of an internal sale, for example, or when owner financing is involved, a course of action that yields the greatest financial benefit for an owner should not threaten the future of employees or put the business at risk. Rather, planning should weigh the needs of all stakeholders and seek to secure positive outcomes for all parties concerned.

Financial Modeling for Business Transition Planning

Financial modeling is the centerpiece of successful transition planning. It builds rigor into the process by marrying what a business owner wants to achieve — family, business, financial and other objectives — to the particulars of his situation. These details include information on assets, liabilities, investments, taxes, contractual agreements and other pertinent data. The end product is side-by-side comparisons of how different choices may affect the business owner’s situation.

In regard to an internal sale, comparing possible results helps a business owner answer two key questions. First, how much does he need to receive from the sale of the business to maintain a desired standard of living? Second, how much can the business actually afford to pay out? Reconciling the needs of the owner with what the business can support helps determine, for example, whether an internal or external sale may make more sense.

Variables of Business Transitions

Once financial modeling is complete, the next step is to introduce variables (different planning options) and analyze their impact on long-term outcomes. Creating such scenarios helps demonstrate in detail the impact of each on the owner and the business. Generally, the unique problems of business owners are best addressed through a team of specialists that includes the owner’s attorney, accountant and other key advisers. A collaborative approach helps the owner receive thorough and objective counsel and contributes to the implementation of key objectives.

The business owner’s banker also may play a role, particularly on the credit side, as the transition process often drives a need for capital. For example, if the management team needs financing to buy out the owner, the owner’s bank could provide that support.

The best adviser is not one who replaces the owner as decision maker, but one who helps the owner clearly see and evaluate different possibilities. A strategic approach to transition planning should present the benefits and drawbacks of each alternative and enable the owner to determine which best suits his needs.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.