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When successful business owners reach a certain age, it becomes imperative that they address the issue of the planning of their business future. Many business owners avoid this conversation for years, yet they often decide on their own how they’d like the succession to play out.
But that doesn’t mean that they actually know what they want.
Many business owners come to Mutual Growth with their own beliefs and emotions that are almost always counterproductive in the early stages of the process.
The brokers at Mutual Growth start with a very frank discussion about what the client really wants. That discussion requires breaking down of their thoughts and confronting not only the realities of succession planning, but also the emotions and family dynamics that are powerful forces in many small businesses.
There’s Plenty of Time
In business succession planning, time is either your ally or your enemy. You can spend time planning for succession during your active business lifetime, or postpone planning and wait until the more chaotic, uncertain and expensive succession planning occurs post-mortem, when the choice is no longer yours.
MG Brokers want business owners to understand that time is critical. Reluctance to accept the realities of time can have disastrous consequences, especially since timing issues are often beyond an owner’s control. Just as the aging CEOs of major corporations are pressed by shareholders who demand a succession plan to protect their investments, so too a small business owner should implement a succession plan to protect the interests of all stakeholders. MG Brokers suggest business owners start early and work with a company (like The Mutual Growth) to develop a plan long before it's an issue. Our brokers ask the client what they want in a long term plan and then we work backwards to get there.
It’s Easier to Just Sell It
Many business owners think it's easier to just sell the business. MG Brokers advise the clients that it isn't always so easy. Finding a willing buyer for any business is rarely just a matter of hanging up a “for sale” sign. Buyers are not necessarily prepared to wait until the time is right in a business’s life cycle before making an offer. MG Brokers set realistic goals for clients.
The same issues of timing influence the way businesses will be valued. Most business owners have an idea of the worth of their business based on revenues, fixed assets, profitability and a variety of balance sheet items. What the business owners want is fair value paid by the buyer, as if that was a constant or objective number.
The United States Board of Tax Appeals defines fair market value as, “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.”
The truth is that valuing a business is difficult and can’t be done just once, whether it’s the intent to sell the business or pass it on to family members who truly want to be in the business. Mutual Growth valuators will recommend an independent valuation of the business, documentation of the business valuation data and methodology and periodic review of the valuation.
A Successor Will Be Ready When I’m Ready
It’s surprising how many business owners come to Mutual Growth wanting a succession plan without a successor clearly established.“Established” means more than simply identifying a successor. It’s also preparing that successor, which may require a long-term succession plan. The plan will certainly involve learning all the operational tasks required in the business, but it may require much more from both the successor and the business owner.
Mutual Growth is the lifeblood of any business. In most businesses, growth comes not only as a result of outstanding performance, but also the careful management and expansion of business relationships. A successful succession plan builds into the long term growth- not only the mastery of business tasks but, equally as important, the building of business relationships. The outstanding taskmaster does not always turn out to be the best rainmaker, and that’s an important thing to learn when identifying a successor. Mutual Growth brokers understand this and help facilitate these plans.
The business owner may also have handpicked a successor that has very different ideas as to how the business should eventually be run. Now the owner has to listen to new ideas about a successful business he or she has built. It’s not easy. That’s why an advisor should stress a long apprenticeship as part of the succession plan.
Equal Is Synonymous With ‘Fair
At MG we do not believe in this this ideology. It isn’t at all unusual for a business owner to say to our brokers that he intends to divide a business equally between all eventual heirs. But MG Broekrs ask...'is that a fair approach?'
Take the successor example above and add two siblings. The successor son or daughter has worked hard in the learning the business, while the siblings have pursued other interests. Are all three entitled to equal shares of ownership, income and control? Anyone will see that the successor certainly won’t think so.
If the business owner transfers a larger share of ownership to the primary successor, the siblings may not think that’s fair. Knowing that someone is going to be disappointed makes it critically important for MG Brokers to establish what the owner really wants.
It’s also just as important for the owner to realize that, whatever the plan, there may be difficult and uncomfortable issues related to potential divorces and other matters that must be accounted for, if not predicted, in a succession plan and MG Brokers help to put the right people in place to facilitate the plan.
While many things can be guaranteed in a successful succession plan, happiness amongst all family members isn’t one of them.
Giving Up Ownership Means Losing Control and Income
Too many business owners see a succession plan as “all or nothing”—that changing ownership necessarily means giving up control and reducing income. However, it’s entirely possible to create a succession plan that transfers business ownership to an eventual successor without losing control or income or—as is vitally important to many business owners—the continued opportunity to build a legacy.
An owner may still run a business and be paid for that role without the loss of title or any of the other satisfactions of operating an independent business. However, the earlier a business owner begins transferring ownership to a successor, the likelier it is for a succession plan to be a success, both emotionally and financially.
Business owners who think that creating a succession plan isn’t worth the trouble are likely people who have never considered the potential long-term tax advantages of passing on a portion of ownership in the early stages of a long training period.
Mutual Growth Brokers will help to establish planning strategies - with a group of strategists - that make effective use of the current federal gift and estate tax exclusions and exemptions by transferring ownership in the business to successors over a long period of time. Our advisors and planners will help to maintain control and preserve the income of the business owner so we can result in ultimate tax savings of millions of dollars in federal and state taxes. At Mutual Growth - we know that good planning is good business! Although no one can know for certain what the future will look like for a small businesses, creating and implementing an effective business succession plan will result in financial benefits, tax advantages and emotional satisfaction, regardless of what the future brings.
