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Business Banking

What is Your Business Succession Strategy?

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8 minutes to read

Wherever you are in your career, the time to start planning is now.

Given the labor, sacrifice, and risk-taking involved in building a successful business, owners have high expectations for the rewards that will come when the business is passed down or sold. The value they take away can finance a life of travel or the next entrepreneurial venture.

Successful transition can result in productive careers for the next generation and a charitable legacy in the community. It may involve all of the above.

Yet many owners aren’t sure about how or even when they’ll move on from their business. According to a recent PwC study, 82% of family businesses surveyed lack a formal succession plan. That can put everyone involved at risk.

A hasty or ill-considered transition could leave a business with less liquidity than it needs to operate, or with outsized debts that give creditors too much say in the company’s future. The child you had hoped would take over may have different plans in mind, or the business might end up being run by family members unprepared for the role.

If you sell to an outside buyer, the payoff could be far less than you anticipated because of poor planning.

The risks are emotional as well as financial. “You’ve worked your whole life to build this company,” says Dan Griffith, senior vice president and director of wealth strategy at Huntington Private Bank®. “The reputation of the business, the goodwill you’ve grown, your passion projects, your workers and their families who depend on the company—all of those could suffer if the transition is not handled correctly."

Reasons to start now

For many owners, there just never seems to be enough time amid daily pressures to focus on planning for this personal and professional evolution. Add to that another stress factor: Transition and succession touch on sensitive topics that even tough-minded business people may find difficult to broach.

Fewer than half (48%) of business owners surveyed say they have discussed their exit with the kids, according to the Business Enterprise Institute. And getting an objective business valuation can challenge an owner’s own beliefs about their business.

Yet demographics show that for many, there’s little time to waste. Baby boomers (born between 1946 and 1964) still own nearly half of all privately held U.S. businesses, and 60% of owners surveyed expect to sell their businesses within the next decade, according to Project Equity.

“Given the stakes, planning should begin several years in advance of an owner’s departure,” Griffith says. “Though your succession goals may evolve as your business and family change and grow, laying a foundation can make that ultimate transition smoother,” he adds.

All the more reason to get going now and find experts to help along the way.

Business valuation: what's your company really worth?

Having a clear understanding of the value of your business is vital, and not just when selling to a third party. You will also need to know the value in order to plan your estate, consider a merger with another company, or in case of divorce or other major life event.

Long before you exit the company, proper valuation can be a vital business-planning tool, Griffith notes. Yet studies suggest too many owners rely on guesswork.

According to a recent Exit Planning Institute study of Wisconsin businesses, while nearly 61% of owners surveyed said they had “a good idea” of what their company is worth, fewer than 15% had gotten their company formally valued within the past two years, suggesting the owners’ estimations weren’t based on current data.

Without proper valuation, owners may develop outsized expectations. Conversely, they might underestimate what their company is worth, potentially costing them a sizable amount in a sale, or even generating rancor in the family.

For example, one owner gave his hard-working grandson what he thought was a modest, five percent stake in the company, only to learn through a subsequent evaluation—the first in decades—that five percent was worth millions.

Not only did it greatly complicate the owner’s gift taxes, it backfired from an emotional standpoint, Griffith recalls. When other family members objected, the grandson came to resent the well-meaning gift and even considered leaving the company.

Specialists such as accountants, tax experts, and other advisors can bring a more objective lens to the process, Griffith says, and they can regularly update you as market conditions change. He adds, “The more accurate your valuation is, the more you can be intentional about whatever your next step is.”

Asset-rich and cash-poor: liquidity considerations

Even for companies with considerable assets and loyal customers, lack of liquidity can prevent a seamless transition. Handing the business down within the family presents other issues. “

If the business is worth $60 million, coming up with the cash to buy you out may be a lot harder for your kids in their 30s than it would be for a third-party buyer,” Griffith says.

A cash-flow crisis could threaten the business. Depending on your situation, transferring interest in the business over time, through trusts, or through outright gifts of voting and non-voting shares, could help lower the burden on the next generation to buy the company.

Liquidity concerns could also threaten the next generation’s ability to keep the business going. If you’ve been relying on, say, a $2 million line of credit, you can’t assume that your heirs will automatically have access to that same level of funding, Griffith notes. “

With some businesses, that line of credit is essential to keeping the doors open. If you haven’t thought through these issues, you could be handing down a ticking time bomb.”

Now may be the time for a careful review of your company’s overall approach to liquidity management, including your operating accounts, your working capital, and your strategic cash.

Extracting value: what will you walk away with?

When the time comes to ensure your own financial future, how much money can or should you take from the business? The answer requires careful consideration of a host of interlocking and, potentially, competing priorities.

Think of your own future—you have new potentials to explore that may include retirement, starting a new business, or supporting a new lifestyle. And then there’s the need to protect and grow wealth for your family’s future.

Seven in 10 affluent families lose their wealth by the second generation, and 90% do so by the third, according to a study by The Williams Group. Estate planning strategies, as part of your succession plan, could help your family avoid becoming one of those statistics.

And, finally, there’s the question of whether the company will survive once the owner’s liquidity needs are met. Because business conditions often fluctuate from year to year, extracting a bountiful payment during a strong year could leave the company too lean to function when the next downturn hits, Griffith warns.

While this is hardly a matter for guesswork, just 27% of surveyed owners have taken the time to calculate what they need from the sale or transfer of their business, according to the Business Enterprise Institute.

And once again, the sooner these calculations begin, the better the chance you will find a comfortable approach.

Charitable giving considerations

The median donation from entrepreneurs is 50% higher than the median gift from other kinds of donors. This reflects the deep connection that many business owners feel to their communities, Griffith says. And succession is often seen by owners as an opportunity to give more or establish a charitable legacy.

But this admirable goal has to be balanced against family needs. Griffith recalls working with owners who felt driven by the desire to support their community, but who feared that sizable donations could leave their kids without a proper legacy. “

A careful review of their finances revealed that they could comfortably accomplish both objectives. And there was even room for them to consider additional charitable opportunities,” Griffith recalls.

A coordinated strategy can extend the benefits of your success to the causes you care about, while helping you achieve business and family financial goals. Giving may also help you meet tax objectives. “Involving a charity in the sale of a business, to either family or outside buyers, can actually result in tax savings and a higher net income,” Griffith notes.

Starting the conversation

As daunting as questions about your exit from the company may seem now, the path to having a clear succession plan can start with the considerations we’ve outlined here. When you’re ready to learn more about key decisions and strategies such as keeping the business in the family or selling to an outside buyer, talk with your Private Bank advisor about other available guides and resources.

While it’s true that there’s a lot to consider, the process doesn’t have to be onerous. A knowledgeable advisor can walk you through each step, introduce you to experienced associates and resources, and help you consider the available options.

For example, Griffith recalls working with married business owners in their 50s who began the planning process early. Because the kids were interested in other careers, advisors helped the couple plan an orderly and profitable sale.

When the husband died unexpectedly, those years of careful planning prevented a financial crisis from potentially compounding the tragedy. The sale proceeded smoothly and family members were left with a secure financial future.

Huntington Private Bank advisors understand the many roles and the responsibilities that your position requires—as a visionary business owner, employer, and as a family member. They can apply their knowledge of the complex issues involved in business transitions to help you plan and execute your transition so that you are better positioned to be successful.