Prepare for the future Featured

8:00pm EDT March 26, 2008

PNC Wealth Management recently released its fourth annual Wealth and Values Survey. This year’s survey placed special emphasis on the attitudes and concerns of business owners.

Smart Business spoke with Jonathan Lander, a senior wealth planner and vice president with PNC Wealth Management, about the survey and the importance of business succession planning.

What did PNC’s Wealth and Values Survey find out about business owners, and how does it relate to succession planning?

The survey found that business owners really love what they do and that a great number of them intend to work beyond age 70. Yet the same attitudes that make the business owner so successful leave the business owner woefully unprepared to successfully transition the business when he or she can no longer be involved.

The survey found that 77 percent of business owners had made a will, but only 33 percent had a business succession plan. The survey also found that business owners felt less confident about having sufficient assets to retire with a completely secure financial future.

What is a business succession plan?

A business succession plan is a mechanism for disposing of a business owner’s business interest following a major life event, such as retirement, disability or death. The plan’s overall goal is the transfer of the owner’s business interest without damaging the business’s operations, impairing the financial security of the owner’s family or paying too much tax.

A business succession plan is usually found in a number of different places. One place may be the business owner’s will. However, a will, because it speaks at death, can only deal with a portion of the plan. Other documents that may contain portions of the plan are buy-sell agreements, shareholders’ agreements, partnership and operating agreements, and trusts.

Remember, the succession plan can take affect during a number of major life events. Death is only one such event.

Why is a business succession plan so important?

The reasons are too numerous to name briefly, but think about some of the consequences that could happen to a business or the business owner’s family without a plan. For example, a proper plan can prevent a deceased owner’s surviving spouse, who knows nothing about the business, from walking into the office after the funeral and asking, ‘Where’s my desk?’ Or, without a plan, how will a retiring owner liquidate his or her ownership interest — for the benefit of the owner’s family — without having to rely on the cash flow of a business in which he or she is no longer involved? On the other hand, where will the business get that cash without hurting operations?

Even in a family-owned business, not planning for succession could have dire consequences. Often, there are children working in the business and children not working in the business. Imagine a business owner with three children, one in the business and two not in the business, who leaves the business equally to the three children. The two children not in the business can now vote their brother or sister out of a job. The flip side of this involves treating all children fairly. If the owner leaves the entire business to the one child who works in the business, what will be left for the other children to inherit?

These are just a few very typical and unfortunate examples of bad things that can happen without a business succession plan. Without a plan, the business could fail or the owner’s family could lose the financial security that it needs, even with the owner having devoted a lifetime of work to the business.

What should the business owner do?

Early planning is an important key to a successful transition. Preparing a succession plan while the key players — the business owner’s partners and family — are healthy and active prevents having to think about the problems of succession at difficult times, such as when a family is grieving over a lost spouse or parent. Transitioning ownership early and over time may also save large amounts of estate tax. Planning early to have funds available to buy out a retiring owner can help ensure that the retiring owner’s family is financially secure and the business is not saddled with an ongoing obligation.

Consult an expert today. It is never too early to plan — and it is crucial not to be too late.

JONATHAN LANDER is a senior wealth planner and vice president with PNC Wealth Management. Reach him at (215) 489-2152 or