Business Succession Planning - Part II

J. Wade Lopez, CFP®, MSFS Abingdon, Virginia. October 21st, 2021

"I'll Just Sell It" Is Not Your Only Option!

Generally, when clients come to us to discuss selling their business, they’re well past the point of having a casual conversation. Often, we see pre-retirees in their late-50s or early-60s, who don’t have a succession plan, and they’re feeling a lot of pressure to come up with a fast, profitable sale. This is far from the optimal scenario, and the fact is, it doesn’t have to be this way.

With a little planning and a generous amount of runway, a good succession plan can give you a smooth lift-off into retirement. Here’s some guidance that may help get you in the right frame of mind to start approaching the issue:

Step back and don’t get bogged down in the weeds. The legal and accounting details of how you execute a plan can feel daunting — e.g., setting up ESOPs, family LPs, structuring an intentionally defective grantor trust; undertaking corporate re-registering and/or recapitalization; creating share classes with voting rights versus economic value, etc. But those details are the job of the professionals you hire. Your primary job is to look at the larger picture.

Think through your ideal big-picture scenario, understanding that the earlier you start, the more likely you’ll achieve it. How do you want this to go? Who’s your ideal succession candidate, under what timetable, and what’s your ideal scenario for transferring value as well as control? Also, how much after-tax income do you need to keep your dignity and independence for the rest of your life? (Most people have no idea, and it’s often less than they think.)

If internal succession is the plan, start as early as possible. Make it part of the hiring process, looking for people who are attracted to a long-term equity stake in the business. Gear your compensation plans toward transfers of value. And perhaps the most difficult part: let your emerging leaders actually lead. Transition strategic and operating responsibility over several years; don’t expect to do it all at the last minute when you’re ready to hand over the keys.

If family succession is the plan, make sure your designated successors actually want the business. Kids or grandkids may think they want the business when they’re younger, but change their mind when they get older, leaving the business owner with no successor and no alternatives. We urge families to have these conversations early and often. And business owners should trust their gut: they know in their heart-of-hearts which kids are truly committed and which ones are just working in the business out of obligation or fear of being disinherited.

Think broadly about all your options. There are all kinds of combinations of internal, external, and family succession options (as well as acquisition and strategic partnership options) that can be combined to give you a customized succession plan that best suits your goals and your business.

Start early. If you get to your 60s and expect to execute a deal in five years or less, a lot of options are off the table. Realistically, designing an internal succession plan should begin in your late-40s, to make sure it’s “fully baked” when you’re ready to transition out. And family succession, with all its gift and estate tax implications, needs potentially a decade or more to be implemented effectively.

Tap your network for strategic guidance. We strongly encourage every small business to organize a small advisory board of 3-5 people: perhaps your accountant or attorney; maybe other small business owners you know; or family members with relevant expertise. You’d be amazed what a semi-annual strategy session — over a nice dinner — can bring to the surface, not just about long-term strategic issues like succession, but also about ongoing operational and growth challenges.

A lot of business owners, by the time they get to us to talk succession, they’re behind the 8-ball, so to speak. And the worst scenario of all is a business owner feeling forced into immediate action because of a health crisis. Those situations can often lead to rash, unworkable decisions that take years of legal and accounting work to untangle for the successors and/or heirs.

So, as professional business advisors we emphasize that there’s no reason to just shrug and say to yourself… “Well, I’ll just sell it.” You have a lot more succession options than that, but you have to plan for it. Take all the technicalities off the table for the moment and just focus on the big-picture strategy and goals. Those are the most important decision to make early, and nobody can make them for you.

These things take time, so don’t hesitate to reach out sooner rather than later. We’d be happy to provide guidance and start the conversation.

Read More By J. Wade Lopez, MSFS, CFP®

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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