It is critical that the owners of privately
held businesses understand that their
business will transition, certainly at their death, and that the overwhelming majority
of opportunity lies in planning for a transition while the owner is alive and the business is continuing to prosper. Many business owners have contingency plans in
place that address an untimely death or
disability. However, the more likely scenario is that the owner lives a normal life
span and at some point will want to redefine his or her relationship with the business. This is where a “during lifetime” orientation to business transition planning
can really pay off — for owners, their family, their employees and the business.
Successful business transition involves a
complex matrix of interrelated personal,
family, business, legal and financial issues.
Also, business transition can take many
forms including: changing the ownership
and management of the business, retaining
the business for family members, shareholder dispute resolution planning, an
internal sale of the business to a key
employee group or a sale of the business to
a third party.
The complexity of these issues prevents
many owners from taking any action at all,
says Lloyd E. Drumm, Senior Vice
President and Group Director of Capital
One Client Advisory Services in Dallas.
Others take only limited action and fail to
deal comprehensively with their situation.
Smart Business spoke with Drumm
about how business owners can best
address business transition issues — an
often difficult process that may happen
only once in a business owner’s life.
When should a business owner begin planning for a transition of his or her business?
Most business owners should start planning early so that the desired transition
path happens more quickly, costs less
money and falls in line with a comprehensive objective set. Also, early planning usually accomplishes more.
The key resource business owners have
to implement a business transition strategy congruent with their family, financial
and personal objectives is time. Successful
business transition strategy can take several years to successfully address the myriad challenges that integrated business
transition presents. More planning time is
needed when there are many objectives or
when the gap between resources and
desires is narrow, and less time when
there are a few objectives to accomplish
and many resources to deploy. Time is an
essential resource for significant tax
reduction.
Most business owners have primary
goals that become the focus of transition
planning. If started earlier, the transition
could also address secondary goals, such
as evaluating the ‘readiness’ of the next
generation to successfully run a business,
resolving conflicts among active and
inactive shareholders, building a management team that will support new ownership or mentoring the family on wealth
stewardship.
What penalties will a business be subject to
if it doesn’t plan properly?
There are no specific ‘you planned poorly
so you pay extra’ kinds of things. However,
an owner can be subject to significant
expenses at the worst possible time with little relief from those expenses. An example
in terms of estate taxes: The government
wants its 45 percent tax paid within nine
months of a person’s death, so there is typically a huge scramble for liquidity by those
who haven’t been preparing for that (or
haven’t been finding some way to reduce
the tax) — this while the company may
have just lost one of its most productive
members, possibly hurting the company
and casting uncertainty among employees
about the company’s future.
Is strategy formation different if the business
owner plans to transition to family members
versus to employees?
If the business owner plans to sell to a
long-term partner or to an unknown third
party, a different — and possibly less complicated — strategy matrix may result than
if power is being transferred to someone
new, such as the owner’s adult children or
key employees. Strategy will escalate if the
owner’s financial or personal happiness
hangs on a successful power transfer.
The critical question here is: Can the business support a significant, nonperforming
stream of payments and continue to compete successfully in the marketplace? The
answer requires management evaluation
and precise financial modeling.
What issue do you consistently encounter
that can be a major roadblock to successful
business transition strategy?
Many transition strategies fail to balance
the current and future needs of the business with those of the owners. Considering
family business transition, it doesn’t make
a lot of sense for the owner to enact strategy that ends up critically burdening the
company into the future. Superior transition design can balance these two critical
objectives and prove successful in delivering the needs of both the departing ownership and the ongoing business.
LLOYD E. DRUMM is Senior Vice President and Group Director of Capital One Client Advisory Services in Dallas. Reach him at
(972) 855-3699 or [email protected].
