Succession planning critical for family-owned businesses

story by Aric Mitchell
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If you think large, evil corporations are running the country, think again.

According to the Family Firm Institute, about 90% of all businesses in today’s economy are family-owned. The thing that most Americans fail to realize is that some of the largest corporations in the world — Wal-Mart and Cargill are two such examples — are family-owned businesses.

And according to Don De Soto, a CPA with BKD LLP, one of the 10 largest accounting firms in the country and the largest in Arkansas, they’re all at risk in the next five to 10 years. But the risks they face are not trying economic times, though that does play a part. The greatest risk comes from lack of planning for the future.

At the Family Enterprise Center’s (FEC) quarterly breakfast held Wednesday (June 30), De Soto spoke to more than 60 entrepreneurs who had gathered at the UAFS campus to hear his expertise on passing the torch. Succession planning, according to De Soto, is an uncomfortable topic but one that must be discussed sooner rather than later. Uncomfortable, he notes, because it forces people to figure out their next life steps, and even brings unwanted attention to the topics of retirement and death.

“Because of the baby boomer generation, a lot of wealth is going to be transferred in the next five to ten years,” De Soto explained at the breakfast held at the University of Arkansas at Fort Smith. “Baby boomers are the largest generation we’ve had in America, and they’re heading into retirement. A recent survey said 72% of CEOs have plans to monetize capital in their family owned businesses (38% over the next five years); 66% just want to diversify their holdings; 43% want to retire; 28% are having financial difficulties; 46% plan to sell to outsiders; and 36% plan to use alternative paths.”

Each statistic leaves the question of what will happen to these businesses when the people at the top transition into retirement, regardless of the path chosen.

“It’s a tough issue to address with your family, because it’s going to cause conflict,” said Dave Robertson, FEC Director. “Everyone has their own expectations. But it’s better to address it early than to wait. Say Dad dies and no one knows what the plan is; then you really have a fight. Without one, they might have to sell the company just to pay the estate taxes. It’s a huge issue.”

To put the repercussions in perspective, De Soto challenged attendees to imagine what Fort Smith would be like if the 38% of owners looking to monetize in the next five years didn’t adequately prepare for the next generation. He said it would affect companies in dire need of leadership. It would water down family wealth in the years to come. It would mean even higher unemployment rates for an already struggling workforce. It would tear down the 60-80% of gross domestic product generated by family owned businesses.

“Succession planning is a process,” De Soto said. “It is not a project you can put on a list and check off in a matter of months, days, or even years, especially with family-owned businesses because things can change a lot due to differences in personality and the fires you have to fight every day.”

De Soto suggests starting with a business valuation.

“You have to know what your assets are worth before you can determine the course that is best for the business and for the family. It’s your business, and you need to decide what you want to have happen. After that, it’s a matter of communicating. Get the facts on the table, get the interested parties together, and ask the hard questions.”

It is also not safe to assume your family will even want a stake in the future of the business. De Soto tells the story about a client, who employed more than 200 people. The client had designs on turning things over to his son, only to find out that his son didn’t want that much responsibility.

There are three main options available upon retirement: transfer and/or sell the business to the family; sell the business to a third party; or institute Employee Stock Ownership Plans (ESOP). The last option is one De Soto said is underutilized, and one that makes for “a great tax planning tool.”

Robertson also encourages family enterprises to lean on the group for support. In the last year Family Enterprise Council membership has grown from 18 to 27, and more than twice that number was in attendance at Wednesday’s breakfast.

“I started my business in 1982, and I thought I knew everything until I joined FEC and started taking part in the peer groups. That’s when I found out how dumb I truly was,” said Fred Williams of Williams/Crawford & Associates. “We lean on each other and learn through support, because chances are if we’re experiencing an issue, one of the other members has already gone through something similar.”

Upcoming FEC functions include a free conference on July 22 from 2-4 p.m. with guest presenters Clifford and John Lyon of SPMI, provider of professional human resource services, and the fall quarterly breakfast meeting Sept. 22 with third generation owner Ben Shipley of Shipley Baking at 7:30 a.m. The events will take place in the Latture Conference Center Building, Room B102, on the UAFS campus. Admission to the breakfast is $10, and will be followed that evening by a trip to the Post Familie Vineyards and Winery in Altus at 6 p.m. The bus returns to Fort Smith at 10 p.m., and admission is $30 per head to cover costs for meal and transportation.

For more information, contact Dave Robertson at 788-7931 or [email protected]