How to succeed with succession.

Entrepreneurs by nature are people who have chosen to control their own destiny. A succession strategy supported by long-term transition financing puts business owners where they are accustomed to being--in control.

How can a soon-to-be-retiring owner get the best price and ensure the buyer is capable of successful management? One very viable option is to structure a gradual transition involving managers already working in the business.

With enough lead time, owners can identify appropriate managers, prepare them for the challenge of ownership and establish a financing structure that enables the incoming owner or owners to buy the business over time and deliver fair value for the owner's equity.

Owners who structure gradual transitions dramatically increase the odds for survival by acting as mentors and sources of experience for the new owner. The beauty of the gradual transition is its flexibility; those with sons or daughters in a business can give their children ample time to gain experience and prepare for the challenge of ownership. In cases where a son or daughter is just entering the business, a structure can be established whereby they share ownership with capable and experienced managers working in the firm.

If there is no potential buyer in a business, the owner can attract a suitable candidate into the company on the understanding that they eventually acquire ownership.

Perhaps the gradual transition's greatest advantage is that an owner is able to more directly control the value they receive for their equity. Owners can usually take their money out in stages by leveraging earnings and the value of fixed assets, often years in advance of retirement--and gradually transfer equity to the new owners.

Capital structures to finance gradual buyouts include: secured term loans, subordinated debt and equity investments. Fixed assets generally are not sufficient to secure the required capital to pay for the true value of a business. As a result, ownership transitions are most often financed with subordinated debt and/or equity in combination with term financing. A gradual buyout addresses one of the fundamental problems of succession: how can I sell my business to internal managers or my children working in the business if they do not have the money to buy the company? Savvy owners know the answer is to plan long-term and let the business pay for the transition.

PLAN LONG-TERM

By drawing money out over time, using a range of transition financing instruments according to pre-set deadlines established in the succession plan, an owner can have 100 per cent of his or her money out of a company by retirement.