Succession planning: Don’t leave it to a pine box

Kern Business Journal
June 2015

My client, whom I will call Joe, is in his late 50s and owns a trucking company. He once considered expanding his business, but instead took a more conservative path of buying several adjacent storefronts and renting them out.

In recent months, Joe mentioned one day selling his trucking company. He believes his business is worth a lot of money. But he also knows that if word got out that he was selling his business, a competitor would likely try to gobble it up at a discount. “Business consolidation” is common in his industry.

Joe’s wife and I have tried to convince Joe to develop a realistic “exit” plan that would consider the $25,000 a month he receives from renting out the adjacent storefronts as a steady stream of retirement income. Joe’s two younger, but longtime employees have expressed an interest in buying the business.

At the moment, Joe is in denial. He has stopped talking about selling. Instead, he told his wife that his exit plan is to be carried out in a pine box. Frustrated, Joe’s wife claims she will take the first offer she receives from a consolidator and sell his business if Joe dies.

Joe is not the only small-business owner in denial. A recent survey by the Financial Planning Association and CNBC revealed few small businesses have succession plans.

More than a quarter of a million Americans are turning 65 every month. The U.S. Census Bureau reports by 2029, when all the baby boomers turn 65 or older, they will represent 20 percent of the U.S. population. Economists estimate that 10 million small business owners hope to finance their retirements by selling or closing their businesses over the next 10 years. But when you ask these business owners how they plan to accomplish this goal, many have no clue. The FPA/CNBC study found less than 30 percent of people surveyed have written succession plans and business owners often ignore advisers’ urgings to develop one.

There are many causes for this failure: family dynamics may complicate passing the business to children or other relatives; owners do not recognize how difficult selling their businesses will be; and an owner may be too focused on today’s problems to think about tomorrow’s. Often, owners who have worked their entire lives to create a successful business just can’t accept the idea of giving their “baby” to someone else. One of my financial planning colleagues described it best. He said some small business owners would rather have a root canal than go through the pain of developing a succession plan. But just like my client Joe, small business owners need to begin succession planning before it’s too late – before they become incapacitated or die. No one lives forever. I haven’t given up on Joe. This is what I have told him to do:

  • Evaluate your business. Realistically identify its assets and calculate what it is worth.
  • Consider sale options. Do family members want to buy it? Are employees interested? Should you retain a broker to market its sale? Identify potential buyers.
  • Discuss plans. Involve family members and key employees in succession planning. Explain what you need and expect to receive from your business’ sale.
  • Determine your role. There are many financial options for selling a business. Do you want a cash out? Can the new owners pay you in installments? Do you want to remain on staff for a period of time to transition the new owners? These generally are decisions made with the assistance of attorneys and accountants.
  • Protect yourself. Buy insurance, test-drive potential new owners, sell your business in segments. These are some steps you can take to protect your company’s continued success and your financial interests.

Succession planning should be a thoughtful, gradual process filled with soul searching, fact finding and goal setting.