Thousands of Baby Boomers are inching toward retiring every day and many of them have family or privately‐held businesses they have built and nurtured over the years. Unfortunately, many are not prepared to sell their business or don't understand the implications of passing the business onto their children according to a recent survey conducted by the Wisconsin Chapter of the Exit Planning Institute. The Milwaukee Business Journal recently assembled a panel of experts to explore how prepared business owners are for transitioning their businesses and what they can do to make the process as smooth as possible.
MODERATOR: Tell us a little about how the survey came about. Why did you decide to do the survey?
MARTHA SULLIVAN: The survey's genesis was the Exit Planning Institute, which did a nationwide survey in 2013 to assess the readiness of business owners to transition their businesses. Since then, the survey has been replicated on a regional basis and Wisconsin marks the tenth survey. We wanted to get our arms around how prepared business owners are for the transition and the various factors that would lead to the successful transfer of ownership. We wanted advisors to be able to use these insights to tailor our support and advisory services.
MODERATOR: What were some of the surprising findings from the survey?
DAVID SISSON: Owners are motivated by different factors, but they are united in not being as prepared as they would like to be.
KELLY MOULD: They all know that they need to do it, but they struggle to do it because they are already very busy running their businesses.
SULLIVAN: Ninety‐eight percent agree that a transition plan is important personally and for the future of their businesses, but 43 percent said they have no plan and 37 percent have a plan that is not documented. Having a plan that's not documented is pretty much the same as not having a plan at all.
SISSON: Building on what Martha just said, the survey found that 74 percent of business owners have no formal training on how to transition their businesses. More than 70 percent don't have an advisory team, and more than half haven't even gone outside of their business to talk to professionals about the process.
MODERATOR: The survey showed that business owners recognize the need for planning the transition, but that very few take the steps necessary to do that. How do you see this manifesting itself in your practice as you work with these owners?
SISSON: When it gets to me there is already a serious problem. Often, it's as fundamental as the stakeholders not having the same exit plan in mind. It's difficult to execute an exit plan if everyone is not on the same page.
MOULD: The survey found that 60 percent of owners rely on income from the business, which can make getting out of it a struggle. That may be one of the reasons they don't plan. They're thinking they can't think about transitioning because they need to maintain their focus on keeping the company profitable.
MODERATOR: Let's talk about some of the best practices out there. What are you seeing that business owners are doing really well?
MOULD: The best‐practice companies start thinking about their transition plans several years (three to five) in advance. Ideally, you would think about exit strategy when you're starting the business so that you can structure it appropriately, but it's rare that people would do that.
SISSON: A best practice is being able to communicate effectively to your family, management team and outside advisors. You can get to a much better place if you have those difficult conversations with people you trust.
SULLIVAN: Business owners have to focus on their financial well‐being, which is where Kelly and her team come in. They have to focus on their personal well‐being—what they are going to do with their lives after they leave the business. At the same time, they have to focus on getting their business ready to sell.
SISSON: One thing that clearly came out of the survey is that most owners don't have a developed support system and they recognize that.
SULLIVAN: Owners shouldn't get hung up on the term “exit” because it has a lot of emotional baggage. It's really just about good business planning. The business owners that have the best outcomes are those that integrate the “exit” best practices into how they operate their companies every day.
MODERATOR: What is a common trigger that a business owner goes through that causes them to go OK, I have to stop and do this?
MOULD: Heart attack.
SULLIVAN: Literal or figurative. There is a fifty‐fifty chance a business owner will be forced to transition their business if they run into one of what we call the five D's: Death, Divorce, Disability, Distress and Disagreement.
MODERATOR: So what are the first steps in the process?
SISSON: Start looking for some advisors. Ask your current advisors if they know someone skilled in this particular type of situation, someone who can quarterback the process.
SULLIVAN: The Exit Planning Institute has a robust credentialing program that trains advisors on being that quarterback. They know when to bring the right voices to the table and they maintain communication with everyone.
MODERATOR: What does the process tend to uncover?
MOULD: There's always something. Maybe their governing instruments don't match the way they have been filing taxes. Or they may have a lot of personal things intertwined with their business that need to be sorted out and pulled apart.
SISSON: This is the risk management phase. Do you have an updated buy‐sell agreement? Do you have employment agreements with key employees? Do you have a plan for protecting your information management system? Have you protected your intellectual property? Do you have an appropriate mix of customers? All of these are important in assessing the value of the business and how to enhance the value of the business.
SULLIVAN: The first step is getting a valuation of what the business is worth. That valuation will feed into a great conversation with your wealth manager. What do you need? What do you want? If the valuation found your business is only worth one‐third of what you thought, will you still have enough to live on?
MOULD: Most business owners think valuation is just a number, but it is much more. It's an analysis that explains why your number is what it is. It shows what things are adding value and what things are subtracting value from the business.
MODERATOR: I would imagine it can be an incredibly emotional time.
SISSON: You are exactly right. Matching expectations with reality can be a difficult process, but it's the most important part of the process. Once you get through it, you're able to do the heavy lifting you need to do.
MOULD: It can be a big struggle to get that valuation because business owners are convinced they know what the company is worth.
SISSON: And they are almost always wrong.
SULLIVAN: So then their next step, especially if they aren't happy with the number, is getting to work to improve it, assuming there's enough time.
MODERATOR: What do business owners need to think about when considering if their business is transferrable?
SULLIVAN: Whether or not a business is transferrable often comes down to a couple of issues. One is customer concentration. If you have too much revenue coming from one customer, your company may not be attractive to a buyer. Another is knowledge transfer. What kind of management team has the business owner created? Are they able to run the company well without the owner present?
MOULD: If a business owner has to call in every day when he is on vacation, that's an indication the business is not transferrable.
MODERATOR: At the Business Journal's family‐held business events we often hear that the parents would like the business to be a family dynasty, but the children are not interested or qualified to run the business. What are your thoughts?
SISSON: The survey results show that. Just because the owner has a plan on how they would like the family business to proceed after they leave doesn't mean that's how it's going to go. And it probably won't.
SULLIVAN: Even if the owner is convinced the business should go to the children, we encourage them to look at all of their options. What would it look like if they sold to a strategic buyer? What would it look like if they brought in a person to serve as kind of a financial foster parent to help the children get ready to take over?
MOULD: Many business owners started their businesses from scratch so they were able to learn and grow with it. They want their children to step in, but it's already a big business and they have less of an opportunity to make mistakes. So that can be a challenge.
SISSON: I will make my pitch again for family communication. Less than 40 percent of business owners say their family is aware of their managerial or ownership plans. Only 12 percent said their spouse is their most trusted advisor. Those are problematic statistics. A family business involves the whole family. It can be difficult to start conversations, but you are much more likely to get better results once you bring issues out into the open and get everyone rowing in the same direction.
MOULD: Sometimes children receiving the business do not look at it as a gift. They think it is logical they would get it because they work there, and they can be envious that the other children got cash.
SISSON: That goes back to the importance of understanding each stakeholder's interests. Do they want lifetime employment? Do they want the wealth the business can generate through dividends? Do you want the profits from the sale of the business? Do you want legacy? Maybe there are members of the family who want to start a family foundation from the wealth of the business. Understanding what everyone wants is a good way of helping you develop a plan.
SULLIVAN: And sometimes it isn't a gift at all. Mom and Dad may need the liquidity, which reinforces David's point about the need for these conversations.
MODERATOR: As entrepreneurs, business owners are into control. They don't relish thinking about the time when they are not going to be at the top of the hill. How much control can they maintain over this process and what advice would you give to them about dealing with the change?
SISSON: They need to avoid micromanaging. It's important to develop a team and let their advisors add value, but the ultimate decisions will still rest with them.
SULLIVAN: The survey showed that more than one third of the business owners rated their personal readiness and their readiness to transfer their businesses as being above average. But only half have documented and updated personal financial plans, and only one third have an estate plan. If you focus on maximizing the value of your business and being prepared personally, you are going to maximize the control you are going to have over the transition process.
MOULD: Two of the survey statistics that stood out for me was that almost 70 percent of business owners have some concerns about the future leadership of the company and 21 percent haven't even thought about the future management.
MODERATOR: Why is it important for owners to plan for the exit from both personal and financial perspectives?
SULLIVAN: A PricewaterhouseCoopers survey asked owners who had sold their businesses in the last 12 months how happy they were with the sale. Three out of four profoundly regretted it. That's heartbreaking. The reasoning behind their regret was the loss of identity, feeling adrift and thinking they did not get the value from the sale of the company that they wanted or needed.
SISSON: It's important to think about what your life is going to be like after the sale, because it will be one of the most significant events in your life.
SULLIVAN: In our work lives, we are constantly being fed intellectually and socially. When you leave your business, the fabric of your life changes and you need to compensate for that.
MOULD: We advise owners to expand their social network and interests because they won't be working 80 hours per week. Sometimes they want to remain working for a year or two, but that doesn't always work out well, because they're used to being in charge. And sometimes, husbands and wives have differences of opinion on what they are going to do in retirement.
MODERATOR: Selling a business is something that can affect the whole family. Can you talk about how the owner should factor in the interests of the family into the exit strategy?
MOULD: Trying to figure out the best solution can be emotional. Some owners recognize that their children may never be leaders and they struggle with what they will be leaving their children if they sell. These challenges are very fact‐specific to each family. There is no one right solution but there is always a solution. You just have to work through it to find out what the solution is.
SISSON: It's hard enough to figure out what to do with the family cabin up north, let alone a family business.
MODERATOR: Comment on the importance of proper estate and financial planning and why it is important that the business value and transition of business needs to be included?
MOULD: A business adds another dimension to the estate plan. You need to make sure it will transition smoothly as an operating entity. It's not a house. It's a moving piece that has to be managed.
SULLIVAN: For most business owners, the vast majority of their wealth is their businesses; however, 58 percent said the transition of the business had not been incorporated into either their financial or estate plans. This means that they are looking at their exit options with insufficient data.
MOULD: That's huge, because liquidity can become an issue. If there's an estate tax due, that money has to come from somewhere and it can cause a real cash crunch.
MODERATOR: Who should be on the owner's advisory team?
MOULD: Some owners bring in their CFOs or they will have an outside party work with them.
SISSON: This goes back to what I said before. You have your inside team and you have your outside team. Your outside team is typically your professional advisors—your accountants, attorneys, insurance agents and wealth advisors. Your inside team should include members of your trusted management team. It's important to keep your key management people informed because executing that plan will require their input.
MOULD: And you better believe that the management team is already talking among themselves even if you are not talking to them.
MODERATOR: Do you have any final comments?
MOULD: Don't worry if you haven't started or completed it yet, because most owners haven't. You are not alone. It should not be an embarrassment, but it is something you should be doing.
SISSON: Think of it as an opportunity.
SULLIVAN: Business owners are people of action, and this is an area where they should take some action.
Kelly Mould, J.D., Wealth Fiduciary Team Lead, Johnson Financial Group
Kelly specializes in family law and estate planning. She has served as an attorney, operated her own law firm, had a judicial appointment as guardian ad litem for Racine County and was an executive in the telecommunications industry for over 20 years. By integrating her finance, legal and communication expertise, she provides comprehensive wealth solutions for high net worth individuals and business owners.
David Sisson, Shareholder (Litigation, Labor and Employment), Reinhart Boerner Van Deuren
David solves problems that arise with separations and transitions involving business partners, particularly in family-owned businesses supporting multiple generations of family members. His extensive experience in sensitive and complex family issues extends to representing fiduciaries and beneficiaries in contested trust and estate matters, and fiduciary litigation.
Martha Sullivan, CEO, Honkamp Krueger & Co.
Exiting now or later? Regardless, always be ready. Be focused. Enjoy income and value. Find out if your business doing what it needs to. You’ll sleep better and have better results along the way. Blending experience as a CFO, COO and advisor to privately‐held and family businesses, Martha Sullivan is a partner in the business transition strategies group at Honkamp, Krueger & Co., P.C.