Succession Planning…
Retiring Minds Want to Know

So you've built a successful real estate business. Congratulations. Now what? Are you going to continue to run your business forever, or do you desire to eventually reap what you have sowed and write new chapters in your life?

Many business owners are uncomfortable talking about aging/retirement, their financial affairs, and especially death. But, the timing is right for many to begin addressing the issue of business succession planning. Your financial future and the future of your loved ones could be at stake.

Let's take a look at three potential options based on the following scenario: Debbie owns a corporate relocation consulting company, called CRC. CRC is a relatively small regionally based company with 25 employees specializing in destination services. Debbie is thinking about her eventual retirement and wondering what her options are for transitioning her company-and her employees.

Option #1: Sell the company.
A national relocation company is interested in her company and negotiates a deal. The purchase price is less than what Debbie feels is right for the company. The deal is made up of some cash up front and a portion of the proceeds in future stock. The company is willing to hire a few of her employees. The closing happens within a few months.

Pros:
- Cash up front (potentially)
- Defined closing date

Cons:
- Taxable transaction
- Value negotiation (sellers usually feel their company is worth more than someone is willing to pay for it)
- Usually a quick transition plan - might be bad for company
- Employees are left with new owners

Option # 2: Shut the doors.
Debbie's efforts to find a buyer do not materialize, and she does not have any heirs to succeed her. As a result, she liquidates her assets, lets her employees go, and wishes her clients the best of luck.

Pros:
- Legally the easiest to walk away from
- Fewer professional fees
- No tax implications related to a sale

Cons:
- No realized value for the equity
- Employees must find other employment
- Clients feel abandoned

Option # 3: Sell to employees through an ESOP.
Debbie sells her company through or to an Employee Stock Ownership Plan. By establishing an ESOP, she is able to sell the corporation for fair market value and without capital gains tax. A Trust is created to represent the employees, and the Trust purchases the stock using company profits. The profits used to purchase stock lower the company's taxable income. Debbie hires a strong manager or team of managers to run her operations and transitions out over an agreeable period of time.

Pros:
- Tax-free sale for departing owners
- Sellers create a guaranteed buyer for their stock
- Corporation reduces its taxable income

Cons:
- Potential of high expenses
- Learning curve for owners, employees, and others
- Owners "cash out" over time
- Future cash requirements can cause cash flow challenges

Did you know that more than 70% of family-owned businesses do not survive the transition from founder to the second generation? In the majority of cases, the assassin is taxes or family dissension. Business succession planning is guided by three main questions:

Who is going to manage the business?

Who is going to own the business?

What are the potential tax implications?

In seeking the answers to these questions, surround yourself with qualified professionals and leverage the expertise of attorneys, accountants, and valuators who do this for a living. It may be equally beneficial to seek out other individuals or companies who have already been through the analysis you are about to embark upon.

Succession planning is not a "one size fits all" program. It does take time and will require some expense to develop a good plan, yet it is well worth the investment and resulting peace of mind. During this time, it's also very important to spend some time thinking about A.D. (after departure) goals. You've worked long hard days for many years and will need to set some goals for how you're going to spend your time and money when you aren't required to go to work everyday.

Departing owners must look at their individual situation and decide what is best for them and their employees. There are several resources to help guide you through the ESOP process including the National Center for Employee Ownership (www.nceo.org) and the ESOP Association (www.esopassociation.org).

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