The latest issue of Family Business features an article about the importance of business owners making their exit strategy plan early. Barbara Spector writes about “The Owner’s Journey” a new Columbia Business School/U.S. Trust white paper that reveals the exit-planning activities of eight business owners, including five who owned family businesses. Here are a few major pitfalls the report and its authors point out.
- Not Recognizing A Need To Shift From Passion To Profit
Many business owners, especially entrepreneurs and founders, create their business out of passion. When they start their companies these business owners are not thinking about getting rich. So money and maximizing revenue has never been at the top of their list. But “The Owner’s Journey” findings are that wealth becomes a priority when the business owner shifts into developing an exit plan.
- Not Developing The Exit Plan Early
A major goal of the white paper was to provide guidance to baby-boomer business owners as they near retirement. One co-author, Barbara Roberts, entrepreneur-in-residence at Columbia Business School, was surprised to find out how many business owners in their 50s had not done much thinking about their company’s future beyond the day they leave ownership. Yet, the longer business owners wait to plan their company’s sale the more they jeopardize their ability to maximize wealth and leave the business when they want to leave.
- Not Understanding How Complex And Long The Exit Planning Process Is
This pitfall relates to the one above. A theme that emerged from the business owner interviews was the owners’ surprise at how long and how complex the exit planning process is. Many business owners view the process as little more than dealing with matters like tax planning and drafting a sales agreement. They often neglect to consider other difficult matters like who will be the successor and how will proceeds from the sale be distributed.
- Not Preparing A Detailed Plan For The Business’s Future
Business owners are not likely to attract buyers unless they have a detailed business plan. The business owners studied in “The Owner’s Journey” revealed the critical importance of being able to show prospective buyers that you’re planning for the future. No one wants to buy a company that seems to be near the end of its ideas and growth. Prospective buyers want to see several years of certified financial statements. They also want assurance that a high-level management team and a solid strategic plan are in place, according to one of the business owners interviewed for the white paper, Lawrence Herbert. Herbert sold his New Jersey firm, Pantone Inc., in 2007 for $180 million.
- In A Family Business, Not Communicating Well About Future Governance
Co-author Barbara Roberts says the report shows how important open communication between family members is. Too often, family members assume that a child will take over the business. But there needs to be a specific plan, agreement, and communication about the plan. Roberts found that family business owners often are proactive about their estate planning but don’t explain their vision of how the family business should be run when they’re no longer leading that business.
- Not Seeing The Difference Between Estate Planning and Succession Planning
Both white paper authors (Roberts and Murray Low, director of entrepreneurship education at Columbia’s Eugene Lang Entrepreneurship Center) emphasize that while estate planning and succession planning are closely related, they are two separate issues. One example was a business owner who created an estate plan that gave equivalent assets to each child but gave control of the family business to one daughter.
- Not Getting Educated Early And Researching Tools Like GRATs
The business owners most likely to avoid exit strategy pitfalls are those who begin to plan well in advance of their retirement. Anita and Ashok Khubani, owners of Fairfield, New Jersey-based Ontel Products, began speaking with advisers about wealth transfer planning and doing their own research when they were still in their 40s.
Roberts and Low recommend that business owners always have their business ready for sale. That requires knowing what buyers are looking for and maintaining a sense of the business’s value. And it requires being educated on the availability of planning and knowing what the exit options are. Roberts says there are ten fates that can befall a business (from IPO to sale to a strategic buyer to transfer of ownership to a management team to liquidation and more). Most business owners aren’t aware of all ten.
One tool that can strengthen a business exit strategy is grantor retained annuity trusts (GRATs.) A GRAT is an estate planning technique that minimizes tax liability in intergenerational asset transfer. Taking advantage of money-saving tools like GRATs requires planning early. When you must sell your business imminently you don’t have the time to look into GRATs or other potentially beneficial tools.
There’s much more in the 48-page report including the fact that two thirds of business owners do not have a formal succession plan. It’s valuable reading for business owners in their 40s, 50s, and beyond.
Gene Thomas Offredi, CFP®, RFC™ is the founder of Guilford, Connecticut’s Summit Investor Coach, LLC. Contact Gene on the web or by phone at 203.453.1017. Summit Investor Coach, LLC is a Registered Investment Advisor.