CategoryFamily Business and Succession Archives — Page 3 of 3 — C. Lynn Northrup, CPA, CPIM

Succession Planning Issues

Here are some questions and issues for family-owned businesses that I hear from many of my clients. I thought it would interesting to share some of these questions with you. It will spark some thought and questions as to how to address these issues.

Succession Planning:

How do you make a smooth transition from one generation to the next?

How do you pass ownership and plan for future management of the business in a fair and equitable fashion?

What is an appropriate organizational design and structure for the company as it grows?

Are individuals well suited to their jobs and the business?

How does the senior and the founding generation accept “letting go” and turning over the business to the next generation?

How can a business that has never or very frequently planned, develop long-range plans for the future?

If you can’t effectively provide answers to these questions, relax because you’re not alone. The challenge of succession planning is one of the number one issues facing baby boomer businesses today. It is getting even more critical because of the difficult economic environment that exists today. Succession becomes more urgent because a willing buyer for the business might not be easy to find. Even if they are a willing buyer, they might have difficulty finding the financing to close a deal.

My advice to first generation owners of family-owned busineses to get the help from people capable of helping navigate through these difficult waters. There are no easy answers and spreading twinkle dust won’t get the job done. It will cost some money and it will take hard work. But when you think about the most valuable asset in your estate it is important to realize that failure to address these challenges could result in the tax man getting a significant chunk of your value instead of your heirs.

Another issue that needs to be addressed is what happens if the owner becomes disabled or incompetent? An effective succession and transition plan now becomes worth its weight in gold. Stuff can happen so it makes good sense to be prepared.

I think that if business owners haven’t done this work they should make a New Year’s resolution to begin this important planning work and get someone to help guide them through the process. For any CPAs reading this post, I would bet that you have clients that fit this profile. If you are not confident in your ability to guide clients through this process go locate another CPA who has experience and specializes in doing this work. Your client will thank you.

Well, I have rambled enough for one day but I hope you understand the urgency of this challenge. We’ll share some additional questions and situations in future posts together with thoughts on the process we use to guide clients as they plan their transition.

Get Help Now!

These are economic conditions that I have not seen ever in a career of over 45 years. It will impact and hurt all businesses, particularly the smaller family-owned entrepreneur. One of the reasons for this is that driven entrepreneurs prefer to go solo and either do not want to ask for help or are unwilling to pay for advice that could save their business. The entrepreneur likes to break the rules and often feels they can get away with things. The danger of this approach in this tumultuous environment is there is a good chance of going down blind alleys with no escape.Now is the time to think strategically about the business. Get the help of advisors who can help lead businesses out of trouble before they get in too deep and go too far. The thinking and planning process is where entrepreneurs need to listen to advisors. If they don’t have an advisor they should go find one. Setting here writing this blog, I can think of several examples where companies didn’t want to seek advice or if they did, they didn’t listen. In some of these instances the results might be fatal. Companies failed to expand credit lines when they could and now getting credit isn’t an option. They also purchased assets when they should have save their cash.

I have had bankers tell me they wished some of these companies would seek help because it makes their job easier and reduces risk. It is all about being penny wise and pound foolish. A little money spent on planning and prevention could be the difference between solvency and bankruptcy. You would think more entrepreneurs would pay the price and choose solvency.

Another issue where procrastination is high is succession and transition planning. Time and effort devoted to putting good succession and transition plans in place allows business owners to preserve the wealth achieved over a lifetime of work. The failure to implement these plans either due to lack of time or not wanting to spend advisor fees results in the loss of all the accumulated wealth or in excessive estate taxes. It also produces a mess for the survivors to clean up when it could have been avoided.

One final caveat is that advisors do their best work when they can focus on fixing the business rather than managing a short-term cash crisis. It is easier to prevent the fire than to put it out after it gets started.

The Family Business Challenge

I thought it was time for me to do a post on family-owned businesses. I have worked for them, consulted for them and advised them. Yes we even started one of our own. As a CPA I have some advantages that many family businesses aren’t able to access and that is my training and experience as a financial advisor and a controller. Accordingly, I will share some of my observations and experiences.One thing I have observed is that owners of family owned business think they are bullet proof and don’t plan for succession. This represents an area where CPAs and family-owned businesses need to spend more time and effort. Without this type of careful planning, a crisis is sure to happen.

Owners of family-owned businesses tend to go solo and not rely on advisors. The entrepreneurial drive creates success but the difficulty comes in sustaining the success as the business becomes more complex. This is when things start to unravel because an effective management team hasn’t been put in place. The sense of separateness and need for control creates real problems because owners have an over-powering urge to do things their way. This tendency of my way or the highway puts many business owners between a rock and a hard place when things start to hit the wall. Then there is often no way out. My advice to business owners is hire advisors who are smarter than they are and have experience in dealing with tough business issues.

Another trait of many business owners is not engaging in an effective process of strategic thinking and planning. Operating from the center of the circle and not using good advisors to guide them through a solid process of management discipline can prove to be a fatal mistake.

The failure to plan and provide for succession is probably the biggest mistake I see as well as the biggest opportunity to provide for the future. Only about 40% of family businesses make it to the second generation and only 12% make it to the third generation. These aren’t very good odds. The down side of these statistics is that current economic conditions will make it difficult for family businesses to sell and get the value built up after years of hard work. This should be a wakeup call for business owners to address the succession planning issue and face the hard facts of current reality.

There are some steps that can be taken to avoid these problems and we will talk about these in future posts.