In the life of an entrepreneur, there is a big difference between funneling all of your profits back into your company and taking every nickel out to support other endeavors and/or investments. And the line between the two is different with every business out there. Our clients frequently ask us for investment counsel to assist them in balancing this equation. As you might guess, there is no “one size fits all” solution.
A successful entrepreneur wakes up one day and realizes that his/her dream for a business has developed a life of its own and will likely continue as a going concern long after the entrepreneur has retired. Products and services will continue to be provided and employees will continue to take home paychecks long after the founder ceases to run the company. This realization brings with it a dilemma: How to transfer the value of the business to someone else in exchange for money?
This is something I am beginning to deal with on a personal level as well. With over $400 million in assets and a dozen employees, I now realize that my own firm will continue to grow and provide paychecks for many more employees long after I am gone. Until not long ago, I had no choice but to constantly funnel profits back into the company—first for survival, then for growth, and eventually as insurance against catastrophe.
The first few years of a new company bring with it stressful periods of low cash flow and occasional borrowing to meet a payroll. With hard work and a little luck, one eventually reaches a period of consistent cash flow, but there remains a constant need for re-investment to sustain the growth. And then finally, the intelligent entrepreneur knows that, even though everything is running smoothly, financial disasters are lurking around any corner. Setting aside capital to deal with the unknown is not only prudent, but can be the difference between long-term success and bankruptcy.
So when do you start planning for the transition of your business? The answer is “As early as possible.” Even though the actual transfer of your business may not occur for many years, the thought process should have started already.
And even though there is no “one size fits all” answer, the questions each business owner should ask are the same:
These are not merely financial questions. If you started the company and it has your name on it, money is not the only issue. The company is your “baby” and it is likely no one will ever care about it as much as you have. You need to balance your need for financial wealth (selling the company for as much as you can) with your wish to have the company carry on the legacy you started. The buyer who carries on your legacy may not be the one with the most cash. The buyer with the best “offer” might be the corporate raider who fires employees and sullies your brand name.
Lastly, how should the transfer of your company be structured? Should you create an Employee Stock Ownership Plan? If so, how soon? Who are your key employees? Are they the ones who might buy your company from you and carry on your legacy? Should they have “equity” before you exit the firm? How should that be structured? What about family members, both those who might be part of the succession, and those who might not? And, although tax strategies alone should not drive your decision, avoiding unnecessary taxes on the transfer of your firm to someone else will be an important part of the transaction.
Your small business may not have a board of directors. However, it’s never too early to start developing your own unofficial board of advisers. Attorneys, accountants and other successful business owners can be valuable sources of information.
I love being a business owner and wouldn’t have it any other way. But it definitely carries with it a set of issues that the non-business owner does not have to deal with.