Business Transition Planning: Understanding Your Options

Robert Buchanan, ASA, CFP®

Banker and Clients

Bob Buchanan
National Practice Leader, Business Transition Planning
Comerica Wealth Management

Business Transition Planning: Understanding Your Options

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Key Takeaways:
  • There may be many alternatives available and each has its own benefits and limitations.
  • Start by understanding your goals and objectives, both financial and non-financial.
  • It is essential to coordinate your business transition plan with your personal planning.
At some point as a business owner, you will transition from your business. All business owners do. The questions to ask yourself are, “What do I want to accomplish in transition?” and “What’s the best way to meet my goals and objectives?” -Bob Buchanan    

Transitioning from your business does not necessarily mean selling your business. There are a number of transition alternatives available to many business owners, and each has its own benefits and limitations. By fully understanding your goals and objectives (both business and personal) and how those objectives affect one another, you will be able to choose the transition path that best suits you.

To help you determine which business transition alternative (or combination of alternatives) is the best fit for you, it is important to investigate a number of business transition topics, focusing on both qualitative (emotional) and quantitative (economic) aspects of the transition. 

Let’s begin by asking a few essential questions and by introducing the basic concepts of each alternative. The answers to these questions, and many others, will affect the direction you head and the alternative(s) you pursue.

  • What ongoing role would you like to play in the company?
  • How much money do you need to live the life you expect after your transition?
  • Do you have enough money already, or will you need cash from the business (either as an ongoing income stream or as a lump-sum payment)?
  • How much ongoing risk related to the business is acceptable in transition?
  • How important are your employees in your transition?
  • Do you have family members who want to participate in the company after your transition?

Assessing your business transition options should start by understanding your goals and objectives (both business and personal), how those goals and objectives interrelate, and identifying the similarities and differences between various alternatives.

Transition Alternatives

Assessing your transition options requires knowledge of planning for how different options will affect you— such as retirement planning, cash flow planning, philanthropic planning, and estate planning, to name a few.

With all of this in mind, the first step is to understand available business transition alternatives. Below are a number of common potential transition alternatives. Examining the personal and business implications that determine their suitability in different situations is the best way to achieve success in transition: 

  • Keep in Family. Transitioning ownership to subsequent generation(s) of family members requires identifying those family members who are both capable of running the business and willing to become owners. This type of transfer is generally accomplished by gift, sale, or a combination of gift and sale. Another option in this category is to transfer ownership but not management. Both of these strategies can be good alternatives for those who wish to preserve their legacies or have ongoing participation in the business.
  • Transition to Existing Owners. Existing owners often have different goals, objectives, and timelines, but transferring interests between existing owners can sometimes be accomplished with less “friction” than transferring ownership in other ways. This is because the “buyer” is already familiar with the business and the implications of ownership.
  • Transition to Management Team. Existing management teams can be a good alternative for those with a goal of providing for their employees. In addition, this alternative may allow ongoing participation in the business, and has the benefit of knowledgeable buyers.
  • Sale to Strategic Buyer. A strategic buyer is a buyer that has some synergistic relationship with your business and can capture returns above and beyond the returns your business produces as a stand-alone business. Generally, these buyers are either competitors or exist somewhere within your company’s supply chain as a vendor or customer.
  • Sale to a Financial Buyer. A financial buyer is a buyer that does not have any existing synergistic relationship with your company. These buyers are often private equity groups (PEGs) and represent large pools of capital. Financial buyers are generally looking for a particular return from an investment and intend to grow the business and resell it within a certain time frame. With sales to financial buyers, there are often opportunities for ongoing seller participation, as well as equity considerations for management teams.
  • Sale to an Employee Stock Ownership Plan (ESOP). An ESOP is a qualified retirement plan under the Employee Retirement Income Security Act (ERISA) and offers beneficial ownership to the company’s employees. An ESOP is a very flexible buyer and allows the seller to structure a sale in various ways to meet various objectives. ESOPs can have significant tax benefits but also come with significant regulatory oversight and reporting. ESOPs may be a good choice for those wishing to transition over time or in a “hybrid” manner, as they can have attributes of several of the other alternatives.
Conclusion

Wealth planning for business owners is inherently more complex than planning for non-business owners; closely held business assets are often the most dynamic and valuable assets on a business owner’s personal financial statement. In addition, business owners often see their companies as more than just an asset — there are emotional considerations as well as economic considerations. As such, preparation for a business transition event requires a high degree of coordination among your personal and business advisors to balance qualitative and quantitative aspects of transitioning to ensure you achieve your personal wealth planning goals.

Assessing your business transition options, and your overall business transition plan should start by understanding your goals and objectives (both business and personal), how those goals and objectives interrelate, and by identifying the similarities and differences between various alternatives. This process leads to choosing the path that is most likely to lead to success for you, however you define “success.” 

Preparation for a business transition event requires a high degree of coordination among your personal and business advisors to balance qualitative and quantitative aspects of transitioning to ensure you achieve your personal wealth planning goals.

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Schedule your 30-minute assessment with Bob.

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Robert Buchanan ASA, CFP® VP, National Practice Leader, Business Transition Planning, Comerica Wealth Management

Want to know more?

Comerica welcomes the opportunity to help. Contact your Comerica Relationship Manager or Bob Buchanan, VP, National Practice Leader, Business Transition Planning at comerica.com/businesstransition.

NOTE: IMPORTANT INFORMATION

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.

Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, N.A.; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Comerica Securities, Inc. is a federally registered investment advisor. Registrations do not imply a certain level of skill or training. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.

October 24, 2022
Senior Vice President and National Practice Leader at Comerica Bank

Robert Buchanan, ASA, CFP®

Senior Vice President

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