Any owner of a closely-held business should be planning for the day when he or she no longer owns the business. Many business owners, for good and bad reasons, do not take the time or invest the resources needed to put a sound plan in place to transition the ownership of their businesses.
The issues can be particularly acute in family-owned businesses. Statistics show that a large percentage of these businesses do not survive the transfer of ownership to a second generation, and an even larger percentage does not survive the transfer of ownership to a third generation.
“But if the business owner is willing to invest the time and the resources to develop a sound business succession plan,” says Jeff Leonard, an attorney with Roetzel & Andress LPA, “the chances of a successful transition of ownership and control are greatly increased.”
Smart Business spoke with Leonard about succession planning.
What is succession planning?
When most people use the term “succession planning” in the context of a closely-held business, they are talking about a process through which the business owner, with input from professional advisers and sometimes family members and key employees, develops a plan to transition ownership and/or control of the business to someone else.
How can a business owner go about putting a plan together?
Business owners need to clarify their personal goals and the goals for the business. Those goals are the foundation of a good plan.
Some of the questions that need to be asked and answered are: How long do I want to stay active in the business? What are my personal financial needs after I am no longer active in the business? Do I want to keep this in the family? If so, are there family members active in the business, and which of them, if any, can run the business when I am gone? Are there key employees who need to be retained to make sure the business can run effectively? What is the relationship between family members and key employees? Where is this business going? What is the business worth?
The answers to these questions aren’t easy, and they require the business owner to make a very honest assessment of existing resources and potential gaps.
How long should an owner wait before putting a plan together?
It is never too early to start the process, and it should be an ongoing process. As situations change, the plan needs to change. The plan should become very concrete and in advance of the time of the actual transition or beginning of the transition. The other people who will be affected by the transition need to be aware of the plan and, as appropriate, have input.
How many options are available?
Options depend on the goals of the business owner. If the goal is to keep the business in the family, then there are techniques for transferring ownership and/or control to other family members. The ownership can be gifted and/or sold to the family members who will be active in the business. This does not need to happen all at once, but instead can involve a transition of ownership and control over time.
If the goal is to transfer ownership to non-family management, other techniques are available, such as transfers of options to acquire ownership interests, outright transfers of ownership interests, and phantom ownership plans that give the employees the economic equivalent of ownership but not actual ownership. Another technique is an Employee Stock Ownership Plan, which can have some significant tax advantages to the business owner and the business — but being a qualified plan under ERISA comes at an administrative cost.
Another option is to transfer the business to a new owner. This could involve selling to a strategic buyer — one who is in the business — or to a financial buyer. It makes sense to hire an investment banker with experience in the industry to assist in evaluating these options and to assist in evaluating these options and in the sale process.
With transitions that involve selling the business, how the purchase price is going to be paid and by whom needs to be considered. Particularly when selling to family members or othe key employees, the owner will be asked to finance all or a portion of the sale. How to make sure the owner gets paid or what happens if he or she doesn’t needs to be considered.
Who should be involved in putting the plan together?
Owners must realize that they probably do not have the skill set to figure this out on their own. It is particularly hard for the owner to address family issues objectively, so it often makes sense to employ a family business counselor with experience in these types of issues. It costs money — but if done well — it is money well spent. Members of the team should include an attorney, an accountant, a business valuation expert and an insurance expert. As the plan evolves, other professionals — such as investment and commercial bankers — may be needed.
JEFF LEONARD is a partner and business services group manager for Roetzel & Andress LPA. Reach him at (330) 849-6703 or [email protected]. Roetzel & Andress (www.ralaw.com) is a full-service law firm with 10 offices in Ohio, Florida and the District of Columbia.
