A few weeks ago, I met a gentleman who has sold off his business to retire because of health challenges. He’s not yet retirement age and retirement was not actually in his plans. Nonetheless, with his health concerns, it was his best option. As a family business, he was grateful to be able to divide his business into four separate units. His exit strategy was selling units of his business to four of his employees, leaving him with a substantial nest egg with which to continue the next phase of his life.
Of course, if you came to Panama and set up a business here, you could easily find yourself in a similar dilemma. How would you handle it differently here from in the US?
Does your business plan include an exit strategy? Do you have business partners here in Panama that could buy you out or other family members that would take over your business?
How will your Panamanian business provide for your retirement when you are ready to take this next step?
What could you expect to happen here?
In the US, for example, family-owned businesses account for up to 90% of businesses. They make up 50% of all employment and half of GDP.
Nonetheless, even in the US, they do not have a good track record with successful transitioning. 75% of businesses intend to pass to the next generation, but only about 40% have a succession plan. The actual implementation of the succession has much worse statistics. Only 30% of family businesses survive into the second generation. 13% will remain in the family for 60 years.
In Panama, while I don’t have the statistics, my guess is that the numbers are much lower. What happens when it’s time for the business owners to step down and hand the business over to the next generation?
What about if you moved to Panama and your children don’t even live here? How will you successfully exit your business when you are ready to move on?
What do you need to consider when planning your succession for business?
Personal business exit strategy
Having your children take over the business is only one of the exit strategies that you should consider. Is the next generation interested and capable of handling the family business? Are you children in Panama? Do they speak enough Spanish? Do they want to live here?
Other possible exit strategies might be:
- Sell your business. Note that this requires preparation. It is not something you can simply decide to do today and be done within six months unless you are prepared to take a financial hit on the valuations. There is a long process involved in getting the business financially ready for the sale.
- Employee buyout. In the example I started with, I noted how the business owner divided his business up and sold it to his employees. What employees do you have here that have the financial capacity to buy you out at the price your business is worth?
- Partnership and take over. Another common way to sell a personal business is to bring on a business partner for the purpose of a future buyout. This might be a competitor or simply a new owner that requires more hands-on training before they are ready to run the business. This could be a viable option if you can find the right business partner.
Have far have you gone in considering your options and exit strategies?
The transition period in the family business
One of the mistakes that businesses make is failing to recognise how long they will need to transition smoothly.
If I were advising you in the US, Canada or England about your transition, I would suggest you give yourself ten years in transition to your children, considering that you would need to choose a successor, train them, give them enough experience, prepare financially for the transition, and then exit the company.
What does your exit strategy in Panama look like?
The risks of failure to plan:
As is shown from the statistics, most family businesses fail to make it through the transition of succession. In part, this is a failure to plan.
My question to you is simple: do you have an exit strategy in place for your business in Panama? Will you sell it? How will you wind it down? Will your children take over the business?
Possibly, more importantly, what goals do you have for the business? Have you sat down and considered expectations, hopes and dreams? Have you considered the future of the business, the vision for where it will be in ten years time?
Some of the risks, when you fail to plan, include:
- clear decision-making strategies
- failure to contemplate the capital and financial needs of the business in coming years
- lack of foresight of the capital required for the older generation to “cash-out” of the business at retirement
- losing money when you are not able to sell the business and dealing with employees that are costing you money while you close the business down
What’s next in deciding your exit strategy?
As you will hopefully have realised, if you hope to retire from your business in Panama, you need to clarify your exit strategy far enough in advance to do it well. Even if you don’t plan on retiring in the next ten years, you might consider some or all of the following steps:
- Mission & Vision – what are you committed to for the next five to ten years? What about the next 20 years? Do you have a clear vision of what is important?
- Strategic planning – for the business as well as for your family. This might include –
- Family goals & plans – what are your individual, collective and business goals? How does this play out regarding where you will live and how long you intend to stay in Panama?
- Financial planning – what are the capital needs of the business in the coming years for growth?
- Estate planning – have you done estate planning (individually, collectively and for the business) in the event of the death of a key person in the business? While Panama does not have estate taxes, remember that if you are a US citizen, the US will insist on collecting their estate taxes on the value of the business. A life insurance policy to cover the value of the estate taxes takes care of this, but consider all the needs of the business and your family. Remember to include your lawyer, accountant, insurance advisor and financial planner, not just the tax advisor.
Strategies to start
If you haven’t got these in place, consider one of the following options:
- a retreat day – get the key players off-site for a day, with an expert that knows how to guide these discussions, and talk about all of these concerns. Start tackling the difficult questions. Completing it in the first round is difficult, but start the discussions.
- a series of shorter meetings on neutral ground – once again: off-site where you won’t be interrupted.
If your family members are all overseas, and not in Panama: they still need to know what to do should something happen to you.
What do they need to know about your business in order to do the best job possible in winding everything down should something happen to you?
If this is something that you need to get started working on, then why don’t we set up a call to see how I can work with you on clarifying what your next steps should be?
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