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Succession Planning: The Good, The Bad, The Promising

By Kelli Bennett, Editorial Intern

The thought of one day having to relinquish a prosperous business built from the ground up creates a great deal of apprehension in the minds of business owners. Among the glut of small business owners, 7 million companies are owned by members of the Baby Boomer Generation. As a majority of baby boomers nears the retirement age, it is no secret that a vast number of business analysts believe that within the next five years the influx of businesses on the market will lead to a large decline in business values. This decline will be caused by a rush of baby boomer owned companies on the market.

The term “baby boomer” refers to the largest birth rate in U.S. history between the years 1954-1964.  According to, 79 million babies were born during this decade after soldiers returned from World War II. Although they are largely characterized by their entrepreneurial panache, they are currently entering the final stage of the business life cycle where “follow-through” is of utmost importance: Succession planning.

Baby Boomers’ Options

Succession planning is not a fly-by-night endeavor. “Depending on how well a business is managed, it can take two or more years of planning to implement a strong succession plan,” Roger Key, a High Net Worth Client Advisor, at SunTrust Bank, says.

Baby boomer business owners all ask themselves the same question: Who will take over my business once I retire? In a perfect world, the 40 percent of family-owned businesses expected to experience a leadership change in the next five years would easily transition into the hands of a adult child and/or grandchild. According to an article and study released by the U.S. Small Business Administration, things aren’t nearly perfect, and, in fact, less than one third of family businesses survive the transition from first to second generation ownership.

One of the most prevalent reasons the X and Y Generations are not comfortable with acquiring a business is due to apprehension, posits Key. The owners’ heirs do not share the same amount of confidence in the current economy as was felt at the business’s establishment. Others are not interested in acquiring a business due to a lack of interest in the market or type of business. The worry of numerous loans and financial obligations also accompany this apprehension.

Potential successors must also take into account the lifestyle changes that will inevitably occur. When inheriting a business, one inherits all of the staff, property and tax responsibilities as well. While the potential business profit may be appealing, this could quickly eliminate accustomed personal time.

Business transitions to family members mainly fail due to lack of business viability and planning. To avoid these issues and ensure a successful business transition Key believes the transition must start early. “Owners should be very deliberate in how they train the next generation, and that training should include both financial and operational aspects of running the company.”

The U.S. Small Business Administration advises the execution of four separate plans:

Strategic Plan: This plan is detailed by each generation as they are given an opportunity to chart a course for the business as seen by them.

Family Strategic Plan: This plan establishes policies for the family’s role in the business. This plan is tailored to the specific family needs to avoid future conflicts.

Succession Plan: This plan will ease the founding or current generation’s concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready. This plan also includes recognizing potential leaders.

While accessing the results and feedback from the planning sessions, Cherly Cran, president of Synthesis at Work Inc., encourages managers and business owners to pay close attention to the company’s leaders of tomorrow.

Estate Plan: This plan will benefit a business owner’s heirs directly by ensuring the estate goes primarily to them instead of taxes.

When “Plan ‘Generation Ownership’” Fails

If reassurance and training do not sway family member’s transition decisions, baby boomer business owners have other options. These options include: Keeping the business into retirement years, selling the business through a third party or using of Employee Stock Ownership Plan or larger company, suggests Key.

PRWeb advises business owners who plan on selling their companies to third-parties to standardize and document all company procedures, investigate transferability of leases and sales and supplier contracts, secure key employees with employment contracts in order to establish a management team that can operate without the current owner. It is also advised that companies possess clean, verifiable financial statements for the past three or more years.

A transition of this magnitude comes with both advantages and disadvantages that need heavy consideration by business owners. According to O’Hara & Company, the high probability that a business owner will receive immediate cash at the close of business transactions and equal treatment amongst the owner’s children are two advantages of selling to a third party.

Despite third-party promises, a business will undergo changes to its personality and culture. For those business owners interested in selling their business and still keeping the gains while ensuring business legacy, there is an option for them. suggests that business owners serve on the company’s board of directors in some capacity. This will ensure the values and traditions are still observed after the transition.

These owners may also be interested in ESOP, which is used by 11,000 U.S. companies, according to the National Center of Employee Ownership. Business owners use ESOP to create a ready market for their shares. The business owner has the option of keeping their shares in the company as well.

Importance of Financial Records, Experienced Management Team and Perfect Timing

Regardless of the transition selected option, business owners cannot transition alone and must ensure accurate financial records. “The deal falls apart when the buyer determines that the target company’s financial statements are incomplete or unreliable. This example demonstrates the absolute necessity of good financial records. It can make or break a business sale,” Key cautions.

The IRS recommends small business owners to keep financial records of gross receipts; purchases; expenses; travel, transportation, entertainment and gift expenses; assets and employment taxes.  Purchase records should also include the cost of all raw materials or parts purchased for manufacturing finished products. The IRS reminds business owners that if travel, entertainment, gift or transportation expenses are deducted, certain elements of expenses should be substantiated.

The figures used to complete these separate records are complied through purchases, sales, payroll, and other transactions including sales slips, paid bills, invoices, receipts, deposit slips and canceled checks.

All companies should also have a summary of your business transactions. Regardless of the field of business, it is imperative that business owners should always double check the type of records required for federal tax purposes to avoid possible delay or penalty.

An investment manager is vital in successful business transition; they can provide market perspective and develop alternative sale options that help meet the seller’s long-term objectives. Where a sale to a competitor seems best, an adviser can develop competing proposals before contacting the competition. This protects the seller’s market and pushes the competition into a higher bid, says James A. Fitts, CFP director, wealth counseling; and Marshall G. Rowe, president and CIO, both of Harvest Capital.

Some small business owners also call on highly skilled financial advisors, such as Key. According to a 2011 survey Cerulli Associates/Phoenix Market International survey, 31.4 percent of high net worth clients utilize financial advisors services to maintain lifestyle after retirement and 9.8 percent use services to leave estate to heirs. Business succession planning falls under these main categories.

As those business owners nearing retirement analyze numbers and various studies, they realize this extensive planning process is not to be taken lightly. They must take into account all of the possibilities when planning the future of their companies. AT

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