It is estimated that two-thirds of all businesses in the United States are owned by baby boomers1 and three-quarters of them will undergo ownership transition over the next 10 years.2 That means potentially trillions of dollars of business wealth will change hands within the next decade!
There is a lot of commentary suggesting that business owners should start succession planning (also called “transition planning”) at some arbitrary age like 50 or 55, presumably because they’re near typical retirement ages. The reality, however, is that business owners must start transition planning now. For all owners who want to continue their businesses beyond their death or retirement, a comprehensive transition plan is critical and must be in place today.
Why? There are two important reasons:
1. Continuity & Security
Traditional transition planning tends to focus on the retirement of the owner; however, the process might need to happen at any time if the owner becomes disabled or dies suddenly. This question is often overlooked by many commentators and planners: If an owner becomes incapacitated or dies unexpectedly today, is there a plan in place to keep the company operating as smoothly as possible or sell it responsibly? A plan that only considers what may happen many years down the road is not complete.
The focus here is not simply on the mechanical or boilerplate provisions in a will or buy-sell agreement that convey ownership at an owner’s death. Instead, the focus should be on the practical day-to-day issues: Who has relationships with key suppliers or customers if the owner is gone? Who can step in to make key management decisions, and what value remains if the owner is suddenly gone? For example, if the owner alone has all the key supplier and customer relationships, the value of the company may be greatly diminished — or even nonexistent — at his or her sudden death.
2. Future Growth & Profitability
Starting the transition planning process now is also a good business practice that can lead to better profits because it forces owners to look at key management capabilities, internal processes and structures that might need to be improved. By thinking about current issues, such as the value of the company today and who would step up to run it if they can’t, the owner can look at their business processes in a different light and make changes if needed.
For example, we recently worked with an owner who was considering a possible sale of his company. One of the reasons the owner was looking at a possible sale was because he felt stretched to the limit trying to run the company his way. After a review, it was determined that the owner’s company was potentially worth much less than what was possible, because he didn’t have midlevel management and internal controls that were necessary to sell the company to an outsider. The owner made changes to maximize the long-term value of the company, which also allowed the business to continue growing in a way that was previously being constrained by his own limitations.
It’s understandable that business owners don’t want to take the time to plan for events that may not be expected to occur until many years in the future. However, by seeing the potential benefit of proactive planning, owners can take the first, necessary steps in the process early, while potentially seizing opportunities to improve the growth and value of their business today.
Of course, a key to any smooth transition is ongoing communication. The management team or family members need to discuss the hard issues and refrain from making assumptions about what is expected to occur. They must have personal discussions about their respective needs, expectations and fears. If all parties are being open and honest with each other, then it’s more likely that the transition will be successful.
For these reasons, starting this process now is not just good planning — it’s good business, too.
Ready to create your transition plan or need a second opinion? Contact our advisory team.
