A Win on Both Sides: Business Succession Planning for Current & Future Owners
A few years ago, one of our clients, the owners of an established electrical contracting company with more than $20 million in sales, let us know that they planned to retire soon. They wanted to determine the best plan for their future and the future of the company they built. After much discussion, they decided to transfer the company to the second-tier management, but needed assistance determining the best way to structure the deal.
Our client wanted a business succession plan that not only minimized their personal tax liability, but also ensured the company continued to thrive and stay profitable after their departure. As a contractor we knew that to achieve these goals the business would need to maintain positive cash flow, a stable balance sheet, and a strong working capital position to maintain their bonding capacity.
If the company transferred immediately to the new owners, it could face bonding and financing issues - both of which could impact overall sales and profitability. Additionally, our client would be subject to diminished returns due to an immediate large outlay for taxes.
By crafting a multi-year business succession plan, Watkins Meegan set up a win-win situation for both the seller and the buyer. The new owners used the business income to pay for the company – plus interest – and the former owner spread the business sale out over a period of several years, all while maintaining profitability and bonding lines.
Just last year, the new owners officially took over all of the company’s operations and management, and the business is continuing to grow. The extended business transfer kept the stability of their balance sheet, so they did not miss out on any opportunities due to finance or bonding issues. It also minimized the former owner’s tax burden, conserving their retirement nest egg.