In the book, The $10 Trillion Opportunity, written by Peter Christman and Richard Jackim, it’s estimated that more than $10 trillion in business transitions will occur in the upcoming years as Baby Boomers retire.
After building their businesses, it’s understandably difficult for many boomers to separate their emotions from the financial and economic realities of a sale or exit strategy. This picture becomes even more complicated because many owners have up to 50 to 70 percent of their total net worth tied up in their businesses.
These owners will need a planned, controlled exit from their businesses to fund their retirement. This means starting with a realistic picture of what their businesses are worth, and understanding what actions they need to take to enhance the value of their businesses prior to any transition. These baby boomer business owners deserve a comprehensive succession plan.
Issues facing Baby Boomer business owners planning for retirement
- Undervalued business prices from a buyer’s market, as other Baby Boomers look to sell
- Leaving hard-earned wealth on the table due to an undervalued business
- Paying too much in personal, capital, estate, and gift taxes
- Loss of control of the process by being reactive rather than proactive
- Need for increasing the value of their businesses prior to putting them on the market
What exactly is a succession plan? It’s a comprehensive road map that addresses all of the business, personal, financial, legal, and tax issues involved in exiting a privately owned business. A solid plan includes contingencies for illness, burnout, divorce, and even the business owner’s death. Its purpose is to ensure the survival of the business; to provide continuity to the business’ employees, customers, and vendors; and to preserve wealth for the business owner’s family.
Without a predetermined succession plan, there’s a possibility that the business owner will undervalue their company and leave hard-earned wealth on the table, pay too much in taxes, or even lose control over the process by being reactive rather than proactive.
On the other hand, a well-designed and implemented plan provides an owner with the opportunity to control how and when they leave, maximize the value of their company in good times and bad, and minimize or eliminate capital gains taxes. Owners who do succession planning find that they have strategic options from which to choose, and, ultimately, reduce uncertainty for their families and employees.
However, a succession plan must be developed carefully and thoughtfully in order to work. One recent survey showed that the number one reason why business succession plans fail is due to a lack of planning on the part of the owner. A separate study showed that most business owners spend more time planning their family vacations than they do planning how and when to leave their businesses.
To be effective, your plan must include these seven essential components:
- A concise statement of your business goals, personal goals, and family/estate goals. This is essential to ensure that all of these goals are consistent and set the direction for the rest of the analysis.
- Assess current values for business interests.
- Identification of specific ways to enhance the value of the business prior to the transfer.
- An analysis of the pros and cons of your different alternatives (e.g., third-party sale, management buyout, family succession, or liquidation).
- Suggestions to minimize any capital gains, ordinary income, and estate taxes related to the transfer of ownership interests.
- An action plan that details the specific personal and business steps you must take in order to prepare for your succession.
- A detailed business valuation to establish a baseline value for the business.
Most business owners think of business valuation as a necessity when reacting to an event such as divorce, death, business disputes, etc. Actually, business valuations can be separated into two different types: those that have to be done in reaction to events such as those previously mentioned, and those that should be done by proactive owners looking for ways to develop succession plans, maximize value, make better business decisions, and prepare for alternative future events.
A business valuation that delivers an accurate, real-world view of where their company stands today allows the business owner to know how company value can be increased. This not only helps for immediate transition purposes, but is also of extremely high value in pre-transition management of the business. Many owners use this process to help them make better decisions in the face of changes in competition, economic conditions, and a variety of other purposes ranging from buy/sell agreements to Fair Value Financial Reporting and goodwill impairment testing.
Since CPAs most often deal with the raw material that goes into a business valuation, business owners most likely will turn to them first. However, finding a CPA who is also accredited to do business valuations is important, because business valuation is about more than just numbers. Business owners can be best served by seeking business valuation assistance from those holding the necessary training and accreditation from credentialing organizations such as the American Institute of Certified Public Accountants (ABV—Accredited in Business Valuation); the National Association of Certified Valuation Analysts (CVA—Certified Valuation Analyst); the American Society of Appraisers (ASA—Accredited Senior Appraiser); or the Institute of Business Appraisers (CBA—Certified Business Appraiser).
As in all things, procrastination is the enemy of progress. There are always benefits to being proactive with the development of a succession plan and doing a business valuation as part of the transition process.
All business owners will eventually leave their businesses. The manner in which they do so will determine the quality of life that their families will enjoy and the future success of the businesses that they built. Proactively engaging in a business valuation will help you complete your vision.
Gordon Robbie is the Managing Director of Bonadio Construction Consultants based out of our Albany. NY office. Anthony Duffy is the managing director of ValuQuest based out of our Albany, NY office.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.