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Part 1: Colorado entrepreneurs should have business exit plans

Across our state, innovative, hardworking people are starting or operating small businesses in a wide variety of industries and professions. Commercial endeavors as diverse as a downtown boutique, a dental partnership, a plumbing service and a tool-and-die manufacturer have an often-overlooked need: a sound, well thought out business succession plan.

What is a business transition strategy?

Broadly, this is a plan for what will happen to a business when the owner is no longer involved. This might be an unplanned separation because of sudden illness, accident, disability, emergency or death. Life might evolve in unexpected ways that threaten the person’s ownership interests in the company, as in cases of divorce or bankruptcy. Or, an entrepreneur might just want to plan for separating from the business in retirement.

A recent, informative article on this topic in Inc. cites the Wilmington Trust for the figure that for almost 60 percent of the owners of small businesses, no business succession plan has been made.

The goals of business exit planning vary widely depending on the kind of business, the number of owners, the desires of owners and their need to provide for family members, and other factors.

Basic decisions

An entrepreneur needs to think about the business and his or her personal situation. Is it a one-person business or a family venture? Is it a professional partnership or a growing business with managers and employees?

First, if the owner were to leave the business, should it continue or wind down and sell off its assets? Another option would be to sell the business. An enterprise that is largely dependent on the unique skills or contributions of the owner might not stand on its own without him or her. For example, if the business is a gallery that sells only art created by the owner or a real estate office that largely depends on connections the owner made in the community over decades, its continuation as a profitable enterprise is less likely.

On the other hand, if it is a closely held family business, the owner (or co-owner) may want to work with his or her family to determine who is best to take over the reins or if it would be better to groom an employee to run the company, keeping ownership within the family or providing for income to flow to them.

A professional practice like a medical, dental, legal or accounting firm is likely to need a way to continue as a going concern with a planned transition for exiting members that keeps ownership within the firm. For example, it would likely not be preferable to have a partner’s portion of a professional partnership pass through the partner’s will to outside owners or through divorce to an ex-spouse.

In part 2 of this post, we will talk about some of the legal techniques and vehicles for carrying out succession plans for Colorado small businesses.

 

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