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Sponsored by: Rockland Trust
September 23, 2024

Integrated Business Transition Planning – It’s Your Decision

Mike Tivnan, Vice President, Financial Consultant

Every business owner will need to decide when and how to step out of the business at some point. Now more than ever, business owners understand the importance of succession planning. And as Worcester and Central MA continue to grow, outpacing the rest of the state in both population and new business growth, now could be the best time to start that planning, says Mike Tivnan, Vice President & Financial Consultant of Rockland Trust’s Investment Management Group. 

Mike Cassata, the Business Owner Advisory Strategist at Rockland Trust, stresses two distinct and important factors that come into play in deciding when and how to transition a business: attractiveness and readiness. With effective advanced planning, a business can increase its attractive qualities and ensure it is ready for the biggest transaction in the life of the owner. 

“Advanced planning is essential to minimizing the impact of taxes on a business sale. As you plan closer to the transaction date, a lesser degree of optimization can be accomplished. Advanced Planning also helps in reducing the amount the buyer would like to put away in escrow to cover for the tax related risks,” says Prasanna Kidambi, Tax Partner in CPA firm Stowe & Degon, LLC based in Westborough, MA.

That said, the first step in assessing attractiveness and readiness for transitioning is to identify the value of the business, says Mike Cassata.

How Do You Determine Business Value?

Determining the value of your business is not a simple math equation. The intangible assets are important when attracting potential acquirers. Ensure you’re familiar with the four C’s of capital:

  • Human Capital: Running a business is a team sport. A company with its eggs in one basket – depending entirely on its owner – will seem riskier to an acquirer and might lower the price they are willing to pay. The value of the business increases when an owner focuses on employee development and key employee retention plans.

  • Customer Capital: How many customers does your business have and how easy will it be to retain them? A diversified and loyal customer base will increase the value of your business, as well as building customer relationships through the customer's perspective.

  • Structural Capital: Well documented know-how and institutional knowledge, including processes and operations, increase business value. Paired with a strong team, structural capital signals to acquirers how smooth of a transition to expect, which may impact how much they are willing to pay to acquire the business.

  • Social Capital: Think of this as your company’s internal and external reputation. For example, businesses with a strong culture and brand are more valuable to acquirers than those without one or the other. 

Determining the value and readiness is only the first step in the process. It’s important to evaluate the transition’s impact on your financial, income tax, and estate planning. Consider these questions:

  • Will the proceeds of the sale be enough to support our lifestyle in retirement?

  • What strategies are available to mitigate my income tax liability on the sale?

  • Which techniques will minimize the estate tax liability for my family?

The “correct” answer to those questions is unique to each owner’s circumstances; assembling a team of a business strategist, financial advisor, CPA, and estate planning attorney will enable you to get the answer right for you and your family. 

“Integrating your financial, tax, and estate plans yields the best results by ensuring that every factor of your financial life is aligned,” says Nina Dow of Bowditch & Dewey, LLP. As an Estate and Tax Planning Attorney, she expresses that “this approach will minimize tax liabilities, while maximizing wealth preservation – to ensure a smooth transition.” 

Prasanna agrees. “The financial plan is the foundation for the client’s future. The strategies we use to reduce current income taxes need to align with the family’s estate plan.”

“The reality is that there are many options for business succession. From passing the business to a family member to setting up an employee stock ownership program to transitioning to a private equity group, it’s important to provide business owners with their options so they can make an informed decision that best suits their needs and values,” says Mike Cassata. 

Succession Planning is Part of Business Strategy

Business owners should start thinking about how to transition as part of their business strategy. “Succession planning should not be a big project to do at the last minute. The more time you give yourself, the more you can do to build and harvest value from your business,” says Mike Tivnan.

An ideal runway for succession planning is 18 to 36 months ahead of time. This leaves plenty of time for assessment and strategy development, correcting any issues and ensuring you get top dollar for all the work you put into building a business.  

What is the Next Step To Prepare my Business for Transition?

As a business owner, you want your business to remain attractive and ready. Once the business is ready, you’ll always be ready whenever the timing is correct for you. Having the power of no on your side allows you to choose and get the maximum value possible.

The Exit Planning Institute found that though most owners sought transition advice in 2023, nearly 80% of owners do not have a formal transition team in place. You don’t need to undertake this process alone.

To start a conversation about transition planning with Rockland Trust, contact Mike Tivnan to plan the next steps to increase the attractive and readiness factors for your business and the personal financial planning essential for your future.

 

Mike Tivnan

Vice President, Financial Consultant 

Michael.Tivnan@RocklandTrust.com

508.320.0858

 

Not Insured by FDIC or Any Other Government Agency / Not Rockland Trust Guaranteed
Not Rockland Trust Deposits or Obligations / May Lose Value