Why Business Succession Planning Cant Wait (OPINION)

It’s never too early for business owners to begin planning for the future of their companies.

Whether it’s their own retirement, interest in selling or an unexpected turn of life events, business owners should put the future of their company in mind now. Feel like you still have a lot of time to plan? So do thousands of other owners.

However, research suggests that roughly half of America’s privately held businesses could change hands in the next decade, due predominantly to baby boomers looking to retire. Yet less than one-third of business owners have a formal succession plan, according to the U.S. Small Business Administration.

But you’re busy. You’re consumed by the day-to-day tasks of managing your company and serving your clients, and that’s understandable. But, if planning for the future has slid to the bottom of your priority list, keep in mind that lack of planning could mean getting a less than optimal price or a messy transition in case something unexpected happens and the succession needs to occur sooner than expected. Preparing a formalized exit strategy allows a business owner to fully evaluate options for transferring the business and set up the right mechanisms that will maximize the business’s value.

Lack of planning may explain why only 30 percent of family-owned businesses survive into the second generation and only 12 percent into the third generation, according to the Family Firm Institute. Don’t be a statistic by letting a lifetime of hard work and investment of time and capital be lost due to family conflict, estate taxes or lack of financial planning.

The first step to building an effective succession plan involves evaluating the options for passing along the business. That may include selling to a family member, employees or a third party, or gifting it to family members. Each option comes with its own considerations, benefits and risks.

Next, get your advisory team in place. Depending on your needs, this team may include an investment banker, an estate-planning attorney, accounting professionals, an insurance adviser and a trust officer. It’s helpful if they have some experience with your line of business and in the area of succession planning. Each can offer specific and unique advice to help you make your business as attractive as possible to a possible buyer or to help create the most seamless transition to an heir.

The advisory team can help the business owner address key issues, such as:

• What is the fair-market value of the business?

• What options are available to finance the transfer of the business?

• What’s the best organizational structure for transferring the business?

• How much value does the business owner need to extract from his or her business transfer to meet retirement goals?

• How can estate and other taxes be minimized during the transfer?

• If a family member will inherit the business, how can the owner ensure heirs outside the business receive a benefit from the estate?

The team you’ve assembled could also lead you to unforeseen opportunities. As a banker, I’m regularly approached by business owners looking to sell a company. But I’m also often approached by investors looking for a business to buy. If you are presented the opportunity to sell during your succession planning, you may find cashing out early to be a more attractive option than waiting on a transition to occur years later. 

And finally, consider what your ideal future looks like. Will you reinvest assets from a sale into a new venture? Will you need an investment portfolio to meet your immediate and long-term financial objectives?

Your business is unique. Every family is unique. Your objectives are unique. “One size fits all” doesn’t work when it comes to planning what happens to your business when you retire. That’s why the sooner you start working on a succession plan with your advisers, the more likely you will be able to transfer your business when you want to, while achieving your desired outcome.

With the same tenacity you grew your business, work to protect its legacy and the financial comfort of your future. 

Jett Cato is president and CEO of Bank of Arkansas. He can be reached at 479-937-2655 or by email at [email protected].