There’s no one-size-fits-all plan for an owner’s exit from his or her business, which means that the process of succession planning requires a good deal of consideration and contemplation on the part of the owner.
Unfortunately, running the business often takes precedence to this important planning process that most owners would rather avoid.
“Succession planning is fraught with emotional issues for business owners, particularly if they’re the founder of the business,” says Chuck Kegler, a director of Kegler, Brown, Hill & Ritter. “Very often, owners are what they do and they have trouble envisioning themselves no longer being part of the business. They know it’s something they don’t want to talk about, unless there’s a health scare or some other triggering event.”
Smart Business spoke with Kegler about why succession plans are a necessary part of owning a business.
What issues are many owners dealing with surrounding succession and exit?
Owners are reluctant to deal with succession unless they feel financially secure. Often, if it’s a family succession, their goal is to do it in a way that they think maximizes the opportunity that the business will continue to affect their retirement. National statistics show that more than two-thirds of all businesses fail in the second generation. And the reason they fail is not surprising, considering that roughly 80 to 90 percent of all new businesses fail. So it makes sense that very often the owner’s children won’t have the skills that the parents have.
If you take lifetime financial security into account, many owners don’t feel secure selling or gifting their business to the next generation, because they don’t know how to invest the sale proceeds in a way that generates the income they need to maintain their lifestyle.
For example, assume an owner of a private business that generates $20 million a year earns $1 million a year of income, after all the expenses of the business are paid. That’s the lifestyle he’s developed. If he went to sell that business in today’s marketplace, let’s say, for a total of $5 million and paid taxes on the sale, he’d never be able to generate that $1 million a year of income based on what’s left.
That’s why owners really struggle with this process. They’re thinking they’re going to be rid of the risks of the business and retire, but then they run the numbers and they can’t maintain their lifestyle based on the results.
