The number of possible successor owners is rather limited. Business owners must choose among (and usually have in mind a specific successor):
- A child or children (or other family member/s)
- A co-owner or co-owners
- A (or a group of) key employee/s
- An unrelated third party
- An ESOP (Employee Stock Ownership Plan)
There are advantages and disadvantages to each choice. It is advised that advisors start the process by securing the preliminary valuation (and five-year cash flow estimate). It is important to help business owners establish their financial objectives by performing a preliminary financial needs analysis. Once these pieces are assembled, advisors will have enough information to show business owners the pros and cons of each possible exit path.
It is important to be aware that some (not all or even most) owners allow sentimentality to interfere with making the most prudent choice for a successor. For example, they may choose – for all the wrong reasons – a transfer to a child or an employee instead of a third-party sale.
An examination of the business owner’s financial needs, combined with a valuation, usually provides such clients the needed dose of reality.