Succession Planning Guidance for the Boomer Generation

Written by, 
Scott J. Scheef, CPA, CVA
Partner | HBE LLP

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Recently, I was invited to join other industry experts to contribute to the Midland Business Journal’s article, “Trillion Dollar Transition Boomers: Rewriting History in Business Succession.” I was eager to provide comments and lend my expertise on succession planning guidance as the issue is vital to what is estimated to be the largest upcoming wealth transfer in history of mankind. You can read the full article written by Dwain Hebda here.

As the article states, 70% of small business in the U.S., employing more than 25 million people with extended impact on about 100 million total individuals, are expected to change hands as baby boomers step out of the workplace. Given the significance of this topic, I would like to share my full responses to the interview questions for added context to those who may be looking for guidance on the sale or passing down of their companies.

Everyone always says to start early when determining a succession plan — exactly how early should a business owner formulate such a plan? How often should the plan be reviewed/revisited and even updated?

Succession planning can never begin too early, and business owners should give it proactive and frequent consideration on an on-going basis. Consideration for whether the next phase of ownership will come from within the company or from an outside purchaser should be continuously assessed based upon the retention and loss of key employees. Often, succession planning is not initiated until the imminent retirement of current ownership, resulting in a situation where the appropriate time to identify a purchaser or groom the next generation of owners within the company is no longer available. Conversely, by starting early, business owners can determine who may be the right fit to purchase the company or, if the purchaser is among the current employee group, to address what we like to call the company’s bench strength. By reviewing the company’s bench strength, business owners can assess what pieces of the puzzle they have in place and what areas they may be weak in. Business owners can then take the necessary steps to retain the individuals that are key to the company’s continued success and recruit or train individuals in areas that may need additional attention.

What are some of the most fundamental questions a business owner should ask when it comes to formulating a succession plan? What are the most commonly overlooked or not-thought-about details in this process?

When designing a succession plan, business owners need to ask themselves, “Who is our ideal purchaser and how can I best communicate our value proposition to decision-makers?” Whether the business is being sold to a family member, key employee, or friendly competition, it is vital to know that the next generation of ownership is truly interested. Business owners commonly assume that next-in-line owners understand the plan for succession or that they are interested in becoming the next generation of owners. However, not communicating the plan to the individual(s) and letting them know the intentions can be detrimental to all parties involved. When the plan is not proactively communicated, business owners run the chance that family members or key employees may look for other opportunities. It is common that after these conversations, family members and key employees are motivated by the prospect of future ownership and engage in the company with added vigor. Similarly, if family or key employees are not interested or are not identified as next-in-line, a discussion with a friendly competitor or other interested party may present opportunities for collaboration and proactive efforts to blend the companies for a future merger/buy-out.

People assume business transition is leaving something lock, stock and barrel to another person, but what other options are there that you’ve seen? How popular are things like employee ownership these days? What makes them popular, or not, as the case may be?

Business transition plans are as unique as the businesses themselves. Transactions can include the entire operation, portions or divisions of the business, specific assets (including customer lists), etc. Often, it is assumed that the new business owner needs to accept everything the previous owner has offered, but this does not need to be the case. Prospective buyers can be in the position to purchase pieces of the business if there are clearly separable divisions or segments and the buyer is willing to split the business apart. If the operations can be separated into individual divisions or companies by two or more different owners, it is common that these divisions or businesses can complement one another to generate synergies, creating continued profitability and growth. It is important for business owners to surround themselves with a group of business advisors who have expertise in succession planning to review the potential sale structure and help think through various scenarios.

Options for employee ownership, which include an outright stock purchase or an Employee Stock Ownership Plan (ESOP), are both popular options that many business owners are taking advantage of when it comes time to retire. The outright sale of the business to an employee is incredibly common and is often preferred because it allows both parties to fully understand what they are getting in the transaction. The new owner is often a long-term employee (or employees) who has a depth of knowledge about the business and the industry. This provides a level of comfort for both parties that is hard to replicate. The use of an ESOP remains a popular option to continue a business while giving individual employees incremental ownership based on longevity of employment. This method is used to get more employees involved in ownership without regard to their position within the company. For business owners, the use of an ESOP also provides the opportunity to perpetuate the life of the company and can also offer unique tax incentives.

Do small businesses face any additional challenges, or have greater difficulty in some aspect of the process, when it comes to succession planning? Do businesses where family is involved provide any sort of additional complexity to the process? If yes to either, what’s your best advice on managing these additional challenges?

The biggest question that business owners need to ask themselves is, “Do I have a business that others are willing to pay money to purchase?” Then, if the answer yes, is the sale price reasonable? For small business owners, the company is not only their livelihood but also like a child they have been responsible for raising. This passion for their business is admirable; however, business owners can benefit from taking a step back to make sure what they are creating is something that others would want to purchase. By viewing the business through the lens of an outsider, business owners can work to determine the areas of the business that may need to be tweaked to remove personalization, making the business marketable to a broader population of potential buyers. For example, it is common when a homeowner sells their home that they repaint brightly colored rooms or make changes to other home features that a prospective buyer may find too personalized. Business owners need to view their business in a similar manner to make sure their operation maintains its character but is not overly personalized to the point that it is not attractive to potential buyers.

It is great to be a part of a succession plan any time that a business can stay in the family and the next generation is eager to continue the work of the previous generation. However, that does not mean it is always without conflict. The most difficult aspect of family succession is often the purchase price versus gifting, or a combination of these two issues. It is a balancing act of identifying what is fair to both parties. Often, the younger generation taking over the business has built their career within the business and has made contributions to the company’s current success. This may make them hesitant to pay the full market price since they have helped contribute to the success. On the contrary, the business owner who is transitioning ownership has shouldered the business risk and is commonly looking for the proceeds from the sale of the business to supplement their personal retirement income. Coming to an equitable agreement with both parties is usually an amicable but difficult conversation. Our advice in this situation is to approach the discussion with the mindset that you are family first and foremost, and each side is blessed with an opportunity to both sell a business and purchase a business.

HBE is Here to Help

At HBE, we leverage our depth of resources in cross-disciplinary business planning to work with clients in creating and executing comprehensive succession plans so they can successfully exit their businesses and accomplish their personal and financial goals. Our team has deep experience and expertise with a variety of business structures, spanning numerous niche industries to give you comprehensive succession planning guidance.

Our succession planning guidance services include, but are not limited to:

• Business valuation
• Buy-sell agreements
• Allocation of purchase price
• Shareholder disputes
• Ratio analysis
• Financial forecasts
• Tax planning
• Financial planning
• Estate planning
• Wealth Management (offered by HBE Wealth Management, LLC)

Our aim is to leave our clients feeling confidence that they have a well-reasoned plan and a proactive strategy in place to achieve their aspirations. For more information, please reach out to a member of our Valuation Specialty Team at (402) 423-4343.