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Planning ahead for a future business transition and assembling a team of seasoned professionals will help ensure a smooth, successful transfer.

If you anticipate transferring your business privately to family members or employees, or if you are considering a sale on the open market, it's best to start planning for the transition sooner rather than later.


Ideally, the transition should be a gradual, multi-year process, due to the complexity involved in most business transition plans. For example, if you think you may be ready to exit your business in the next five years, now is the time to start that process. While that time frame surprises some business owners, taking a long-term approach allows for a well-thought-out transition.


Assembling a transition team


As a business owner, you know your business better than anyone. Because of this, some business owners make the mistake of thinking they can handle transitions on their own, without the help of professionals who specialize in taxes, business valuations, investment management, estate planning and succession planning. However, unless you have extensive experience handling business sales or mergers, you'll need the help of a team of trusted advisors to identify and map out the complexities of your transition plan. Professional advisors can also bring  objectivity to what can be personally and emotionally challenging decisions.


As you build this transition team, it's important to identify one key advisor who can take a lead role for the process and coordinate efforts for a smoother transition. Because your expert professionals are often focused almost exclusively on their own areas of expertise, their view of the bigger picture may be limited. Think of your key advisor as the moderator for your business transition team, there to help resolve contradictory advice and disagreements that may emerge, which can be costly and inefficient.  


In addition, if you need help building this team of professionals, start with your trusted wealth advisor. This individual or firm will play a key role in ensuring that you have the right team members in place to address your goals.


Identifying planning gaps


Here at BNY Mellon Wealth Management, we’ve identified six key planning considerations that should be discussed with your team of advisors to prepare for a future business transition.


Contingency Planning


Although you may have specific goals for business growth and profitability, planning for various outcomes can help you be prepared for any contingency. Cash-flow planning is an important component of strategic business planning for businesses at any stage of the lifecycle; however, three-quarters of business owners surveyed admitted this is an area where their plans are weak. Your financial models should contemplate several different contingencies and your transition plan should be designed around more than one potential outcome.


Ownership Structure


Another common theme we heard from business owners is that they haven't thoroughly evaluated the ownership structure considerations that come into play with business transition planning. Your plan should consider more than just who will assume ownership after the transition; it also needs to address how ownership will be structured. Tax implications are one factor in determining the structure of a deal; however, considerations such as the long-term goals of the family, the time frame of the transfer, as well as the level of control and involvement you will maintain during and after the transfer should all be addressed as well.


Tax Planning


Transitioning a business can result in very different tax ramifications for the business and its shareholders, depending on how the deal is structured. Considering the different scenarios and how they relate to your objectives will enable you to make informed decisions.


Estate Planning


Business owners may have done extensive estate planning, identifying how personal assets should be managed in the event of business owner incapacity or death. However, many business owners fail to include their business assets in their estate plans, which can lead to time-consuming and costly estate administration.


Succession Planning


Planning for the orderly succession of your business involves more than just a handoff of financial responsibility and rights; it is also an opportunity to identify and train a successor who can continue running your business in the same way you would. Knowing that plans are in place can give business owners peace of mind, yet many admitted this is an area where they haven't devoted enough attention.


Personal Financial Planning


Just as business owners' estate plans are often limited, so too are their financial plans. Taking a deliberate and broad approach to financial planning, including your personal wealth and various business success and succession scenarios, will position you to better meet your goals for your business, your retirement and wealth transfer to future generations. Creating a detailed budget and forecast will also help you evaluate your "bottom line" — the minimum you must net to satisfy your future needs. You may be pleasantly surprised to discover you can accept a lower sale price than you had envisioned, and thus can choose your buyer based on other criteria, such as employee retention.


Case Study: Putting a long-term approach into practice


John is the owner of an imported food business. After 25 years running his business, John began thinking ahead to the next phase of his life. He decided he would be ready to transition out of his business in the next five years.


In the early stages of his business, John assembled a strong team of advisors to provide advice for both his business and his family, which includes his wife, Diana, and three children — Ben, Clare and Alison. Core team members included a CPA, a business attorney and an estate planning attorney. When John began considering the transition of his business, he also added some new experts to his planning team, including an additional CPA who specialized in business valuations and an insurance agent. John also selected BNY Mellon Wealth Management as his investment manager.


Understanding that collaboration among advisory team members was important, John encouraged a coordinated approach and chose BNY Mellon to take the lead as the key advisor for the transition process. Although he watched his costs closely, he understood the value that each professional was contributing to the process. In fact, one of the most productive and critical events that set the stage for the transition was a day-long meeting with BNY Mellon, John's estate planning attorney and key management personnel from his business. By sharing their thoughts on the impact and mechanics of the many options for structuring the sale and their personal estate plans, John, his family and his key managers all understood and agreed on the final plan.


Estate and Tax Planning


John realized the transition of his business would have estate and tax implications, particularly given his family dynamics. Ben and Clare had worked alongside him in the business for years, whereas Alison, his first child from a previous marriage, was not as involved. Addressing all of his family's needs and expectations was important to John. As he consulted with his team of professionals, John made sure that his wife and all of his children were a part of the process.


The first step for his team was to review and update the estate planning documents John and his wife already had in place, to reflect the planned business transfer. These included a will, a revocable trust for John and his wife, and power of attorney and health care documentation. The team took the time to understand the family dynamics, paying particular attention to  address the issues that can arise in blended families.


The next step in the estate plan was to incorporate leveraged gifts for John's children and grandchildren in the form of grantor retained annuity trusts (GRATs). John also considered the long-term effects of this type of trust. He allowed the experts to focus on the provisions in the remainder trusts after the expiration of the terms of the GRAT. Taking the time to address these issues up front can be critical for future family harmony.


After in-depth discussions about how to plan for and to mitigate estate tax implications, John and his wife purchased a second-to-die life insurance policy, which provides benefits to the heirs only after the last surviving spouse dies. In conjunction with this, they also executed an irrevocable life insurance trust, which names a trust and trustee as the beneficiaries of the life insurance policy, and includes rules set for the trust. This structure is designed to provide needed liquidity to pay estate taxes.


Business Transition Planning


Because John's team was in place, he was able to begin planning for the sale of his business years in advance. He worked with his advisors and took action to improve metrics on accounts receivable and his return on investment, making the business more attractive to potential buyers.


John also assembled an excellent management team who would be willing and able to continue in their roles after the sale, helping to ensure continuity in the transition. Because John's children were part of the management team, John's business transition planning and estate planning often overlapped. By involving his family from the beginning, John has ensured a smoother transition when the time came for the sale, without risking family harmony.


Personal Financial Needs


With any business, the owner's personal and business affairs are intertwined, and John's imported food business was no different. John's team of advisors, led by BNY Mellon, worked to refine his personal budget to accommodate contingencies and legacy gifting.


And, because of their familiarity with his business transition goals, John's advisors were also able to arrive at a reasonable bottom line for the sale of the business that was expected to sustain the future lifestyle John wanted.


When it came time for John to choose a buyer, having this depth of personal and business financial planning allowed John to select the buyer whose philosophy for the business was closest to his own philosophy, rather than simply choosing the highest bidder.


The support of BNY Mellon Wealth Management


Planning for a future business transition can be complex. Having the right team in place and giving yourself as much time as possible to prepare for the transition will ensure the process is as smooth as possible. In addition, it's important to keep your family involved. Consistent communication and collaboration throughout the process will help maintain family unity during and after the ultimate transition.


At BNY Mellon Wealth Management, we understand the complex nature of planning for a business transition and that every business owner is different. We have experience working with teams of professionals during these transitions and taking the lead as the liaison among these advisors and between you and your team. We encourage our clients to take their time making decisions and to rely on the expertise of their team, and we are there to offer support throughout the entire process. We would welcome the opportunity to assist your family in reaching your goals through a successful transition out of your business.

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The information in this paper is as of December 2022 and is based on sources believed to be reliable but content accuracy is not guaranteed.


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