Use business succession plans to ease transitions

Published 1:55 pm Thursday, September 29, 2011

The term “business succession plan” conjures images of everything from big corporate boardroom deals to what your uncle writes on a napkin to transfer ownership of his pizzeria to your cousins.

Approximately 90 percent of U.S. businesses are family-owned, reports a recent edition

of Trusts & Estates. These include Wal-Mart, Ford and about 35 percent of the businesses on the S&P 500.

Sadly, only about 30 percent of family-owned companies survive the transfer to the second generation. Just 12 percent survive into a third generation and only three percent into a fourth generation or beyond.

Many baby-boomer business owners seek to secure their retirements by selling their companies, but only one in five businesses for sale will be bought. Economic uncertainty has slowed mergers and acquisitions. Buyers seeking financing for acquisitions may want to consider the U.S. Small Business Administration as an option.

Despite these challenges, thoughtful business succession plans can help transfer family-owned companies to subsequent generations and provide secure retirement income to the seller. Some plans do fail — the majority for family reasons rather than business reasons.

Following are some tips that Snohomish County businesses should weigh as transitions are considered:

Start early: Preparations for an intergenerational business transfer should begin three to five years in advance to deal with issues such as assigning ownership and preserving relationships with vendors and customers.

Communicate clearly: The senior generation must communicate candidly with the junior generation about their financial and retirement expectations, and the junior generation must communicate just as clearly their expectations for transitioning the business.

Seek expert support: Involve a strong professional advisory team: an attorney who works with family business succession planning, a certified public accounting firm and a bank that can partner with the family.

With these elements in place, the family must realistically determine a value for the business and compare that value with the seller’s need for retirement income. Can the senior generation meet those needs by selling to the junior? This calculation will help determine whether to sell the business within the family or to outside parties.

It is important to calculate, with the same realism, whether the junior generation can run the business.

Current owners must frankly assess whether their juniors have sufficient communications abilities, personal skills, business knowledge and experience to convince customers and employees that the business will remain viable. In any transition, it’s vital to communicate plans and goals clearly with these groups and to highlight the benefits of continuing business operations and relationships.

It’s important to have contingency plans in case an in-family transition, for whatever reason, simply doesn’t work. If plan A fails, it’s crucial to have plans B and C ready. Also, the due diligence for a business transfer within a family should be just as rigorous and detailed as for sale to a third party.

To sell within the family, owners may want to explore with their tax consultant the idea of reducing the value of their estates, and the estate taxes, through tax-free gifts (by both owner and spouse) to heirs, heirs’ spouses and their children. They can also decrease the value of the business by offering discounts on family business stock, arranging deferred compensation to the seller, leasing assets such as real estate or equipment, and charging licensing and royalty fees for intellectual property, such as patents or copyrights.

Alternatively, to sell outside of the family, owners should maximize the value of the company for the best sale price, relying on the team of professionals to recommend appropriate accounting and legal steps.

Finally, a business succession plan isn’t done until it’s activated. The living document should be adjusted from time to time to reflect changes in the owner’s objectives, the value of the business and market conditions. Entrepreneurs should periodically review their succession plans, as they do their insurance coverage.

All of these considerations reinforce the need to start succession planning early, communicate openly with potential successors and have the right team of advisers in place to review the options.

Mandi Wagner is a business banking relationship manager for KeyBank in Everett. She can be reached at 425-789-2824 or at Mandi_Wagner@KeyBank.com.