Business succession happens to every enterprise at some point. Ideally, it occurs in a strategic manner, according to the carefully created plans of the owner with the collaboration of trusted advisers. This orderly transition is designed to maximize the value of the business for the owner and to provide for the enterprise’s continued operation, providing ongoing jobs for the employees and ongoing profits for the new owners. Too frequently, though, business succession occurs amidst the crisis of an owner’s health problems, death, divorce, or other unforeseen event. In these circumstances, the value of the business is rarely maximized for the owner or the owner’s family and the continued operation of the enterprise is jeopardized, as are the jobs of its employees and the earnings for the new owner.
Although the benefits of orderly succession are evident, The Society for Human Resource Management reports that only 23% of businesses have a formal plan in place and that most of these plans exist for larger organizations, those with 2,500 or more employees. Formal business succession plans are far less frequent among smaller companies. One reason for this is that many owners of smaller businesses intend to pass their organizations on to their children. The owners’ intention to create a profitable enterprise that can benefit future generations is certainly a noble one, yet only about 30 percent of these businesses are, in fact, passed successfully to the second generation. For this reason, all businesses, even those priming a son or daughter for future leadership, should have thorough succession plans that consider all contingencies that may impact the business and its owner.
Like most major decisions, a good business succession plan begins with good advice. A business owner may pass a business to a new owner or a designated successor only a time or two in a lifetime. A good adviser, on the other hand will have participated in dozens of successions, witnessing in each the decisions and processes that have led to both success and failure. The adviser ideally will bring that knowledge, experience, and strategic vision to the current owner, who most likely has little relevant experience with the process. The role of the adviser is to coordinate the activities that are proven to maximize the enterprise’s valuation throughout the succession process. This effort goes far beyond the initial valuation. It includes minimizing the disruption to the business that may result from an owner engrossed in the succession process. It also includes a plan to retain key employees and clients to ensure an ongoing stream of income for both the retained employees and the new owners. The adviser may also have key relationships with potential buyers or create a marketing plan to attract them.
The business succession adviser may coordinate with other external teams to coordinate key needs of the business or the owner throughout the transfer process. For example, the adviser may call in a team of financial professionals to consult with the current owner to ensure that the proceeds of the sale provide the liquidity required to secure the owner’s retirement or the purchase of a subsequent business. It is also important to note that some estate planning strategies that may help the business owner avoid taxes must be put into place before an offer for the business is accepted. An accomplished adviser will have these and other considerations in mind to ensure the success of the owner and the enterprise.
There is a lot to take into account. Planning for an orderly business succession to a new owner should begin well in advance of the anticipated liquidity event, even in the best of circumstances. If there are operational units within the enterprise that will require optimization prior to the sale to ensure the highest valuations, planning may need to begin much earlier. Of course, when it comes to the myriad of threats that cause an unplanned and disorderly transition of the business to new owners, planning cannot begin soon enough.
» Mark Blackwell is a Certified Wealth Strategist® and the Mississippi Area Executive for Regions Private Wealth Management. He can be reached at firstname.lastname@example.org.