Your clients are successful business owners. They’ve invested years and the bulk of their financial assets into the business they’ve grown. But helping clients move on from the company they’ve built can be daunting.
But now, they’re looking forward to the next stage—be it another venture or a well-earned break. At this point, they’re wondering how it will happen. There are so many steps in between now and then. That’s where an advisor can add value.
Developing a succession plan is often one of the biggest undertakings business owners must address, as it affects both their present and future paths. For advisors, your job is easier if you know how your client will exit the business.
That’s why drawing on the experience of a succession professional is important. He or she can help ensure a smooth transition by building a comprehensive plan so all the necessary components are addressed.
A strong future
First, tell clients to stop thinking of succession as “the end.”
“Succession is the most poorly understood term [we use],” says Carole Spooner, CA,TEP, director of succession services with MNP. “When most people think of succession, they think of death or taxes. But it is much more than that.” Putting together an effective succession or exit plan is more than just planning for the end of involvement in the business. It is planning for the strong future of the company, and the quality of life after the client walks away.
“A business owner [has] invested years building that business—it’s been a huge commitment. And this really is a way to enjoy the benefits,” explains Spooner.
A strong exit plan should develop a continuity plan to figure out the process of transition, whether that transition is an outside sale or passing the business down to the next generation. It’s important to realize the way the client manages the business today has implications for tomorrow.
By making a succession plan a part of your overall business strategy, the client will have a framework built into his or her business to enable a change in management or ownership without major disruption. To do this successfully, however, tell your client to think ahead about five years or so.
This may seem like a lot of time, but in order to get it right—from a business, tax and personal point of view—an extended time frame is necessary. With proper lead time you’ll be able to choose coma transition strategy, identify and then groom potential successors—this is especially important when transitioning to a family member or someone already involved in the business, rather than an outside sale.
It also gives time to clean up the company’s structure, ensuring any superfluous assets are dissolved so the client can focus on increasing business income and improving its value and sustainability.
A good exit plan ensures the greatest chance of success. And while it is a critical part of the life cycle of any business, focusing on day-to-day operations can make it difficult to sit down and go through the process required. People busy running their operations tend to procrastinate simply because there is so much to do. Working with an experienced succession professional will help fast-track the process.
Start with the owner
When working with a client, Spooner agrees the fundamental starting point is the owner. “We start by identifying what his or her objectives are and then draft the overall plan, including the business plan, to match,” she says. Every company and every industry is different.
“The driver for any kind of succession plan is the objectives of the individual. And those are always different, too.”
The time spent at the beginning of the process, understanding the issues and managing the expectations, will pay huge dividends when the time comes for the owner to move on.
When putting together an exit plan, the key areas of focus are: to whom, how and when you’ll succeed the business; maximizing value; asset management; retirement needs; and tax planning. (For more on maximizing value, see sidebar “Driving value,” right.) Your client needs to understand where the business is now, where the business needs to be, and what needs to be done to fill the gaps.
Working with a succession planner, you and the client will analyze the current value of the business— examining statements of net worth, analyzing cash flow and conducting industry research and market analyses.
You’ll also look at how much is required to fund retirement and ways of building value in the business to meet those needs. Working with a tax specialist will ensure the tax structure allows maximum flexibility for estate planning, income and capital gains consideration.
You and the succession planner should work in tandem with your client’s banker, lawyer, and family.
Lots of moving parts
Spooner says an exit plan has a lot of components involved; for instance the retirement plan piece. “Ensure that their exit strategy works with the client’s expectations for retirement.The plan has to be legally effective, so lawyers have to be involved.”
In addition to a proven track record, working with a succession professional serves another important function—it means another independent advisor on the team.
When it’s a family business, the governance and communication plans that are part of your client’s exit strategy are especially critical to success.
Even if your client is passing a business down to a family member who is already involved, ensuring a successful transition requires a complete and detailed plan.
Only about 30% of businesses survive this kind of transition, and those that fail often leave numerous family members without a livelihood.
With so much at stake, ensure your client gets the most out of succession by starting the conversation early, so you can plan ahead together.
Dave Zimmel, CA, CPA (IL, USA), CMC, is a partner and the vice president of private enterprise for MNP in its Calgary office.