The future is now
Many business owners inadequately address succession planning

For business owners everywhere, and particularly baby boomers approaching retirement, succession planning is an important issue. A formal plan is critical to ensuring that ownership of the company passes smoothly when the owner leaves and, ultimately, to preserving the stability of the business.

But retirement isn’t the only reason to create a succession plan. Disability, death and even unforeseen marketplace changes can drive owners to sell or depart from a company. Despite this importance, surprisingly few business owners have taken the time to adequately address their succession planning needs.

A crowd gathers - Many business owners assume that the market will be ripe with willing buyers when they’re ready to retire. Unfortunately, a buyers’ market is expected to ensue as baby boomers retire en masse. The oversupply of sellers will likely depress pricing multiples and allow buyers to be pickier when selecting acquisition candidates.

Bottom line: A sale may not be the most viable exit strategy. Instead, owners may need to groom a second generation of leaders from the inside.

All in the family - Family-owned businesses face their own succession planning challenges. Less than a third of family-owned businesses are successfully transitioned to second-generation management.

In some cases, entrepreneurs automatically assume that their children have the ability and desire to carry on the torch. Other parents just can’t let go, and their ongoing involvement undercuts the successor’s ability to manage the business.

Family business owners should realistically assess their heirs’ skill sets as well as their personal and professional goals. Although some parents find it difficult to admit, they may be wiser to sell the business over to unrelated employees or another third party.

Furthermore, when first-generation owners decide to retire, they should formally relinquish control and avoid providing unsolicited advice to the new management team.

Valuators to the rescue - Fortunately for any company — family-owned or otherwise — help is available. Valuators can work with business owners to develop comprehensive succession plans. The following list provides a sampling of the ways appraisers can help business owners with their succession plans:

Establish reasonable valuation expectations - Often, business owners have only a vague notion of what their business interests are worth. Valuators can provide industry rules of thumb and rough preliminary value estimates to avoid unpleasant surprises upon retirement.

Devise creative buyout terms - Savvy agreements with the next generation of leaders can provide retirees with ongoing cash flows and minimize taxes. Possible alternatives include installment sales, earnouts and consulting agreements. Appraisers may also advise business owners about funded retirement plans, such as profit-sharing plans, 401(k)s and Roth IRAs.

Propose detailed practice continuation agreements - Sole proprietors, single-owner firms and other parties to these unique contractual arrangements are typically competitors who mutually agree to buy each other’s businesses if the current owner dies, retires or becomes disabled.

Discuss gift and estate planning issues - When second-generation owners are related parties, gift and estate planning becomes even more significant. Valuators can also draft formal valuation reports to accompany gift and estate tax returns.

Provide input on valuation-related provisions of buy-sell agreements - For example, an appraiser may prescribe predetermined pricing multiples, methodologies or valuation discounts to help ensure the agreement’s validity and usefulness.

Today’s the day - Business owners need help protecting their most valuable personal assets — their private business interests. Succession planning shouldn’t be put off until the last minute. It requires forethought and diligence. For owners who haven’t started planning yet, there’s no time like the present.