As baby boomers retire, a large gap exists across the business spectrum for finding the next generation of leaders within a company. Most business owners have made a good living and hope to leave a legacy to their family. Many businesses in Clark County, if they haven’t already transitioned or sold the business, will soon be faced with the same dilemma. What is my business worth? Do I sell to family members, competitors or employees? What about an outright sale to a third party?
The Family Business Institute reported that 88 percent of current U.S. family business owners believe the same family (or families) will control their business in five years. However, only about 30 percent of family businesses survive into the second generation; 12 percent are still viable into the third generation; and only about 4 percent of all family business operate in the fourth generation or beyond. Family businesses are responsible for 60 percent of the jobs in America and 80 percent of the new jobs created. These statistics do not support the optimistic belief of today’s family business owners, especially when we as business advisors are interacting with our clients, colleagues and friends within Clark County.
With so much at stake, it is common for business owners to feel lost or confused as to what to do. So where do you start? Who do you talk to? Across the business spectrum, Certified Public Accountants (CPAs) are viewed as trusted advisors. Your CPA can help you identify underlying key issues and assist in your succession plan.
The following are five common issues that arise during succession planning:
1. Generational transition: As previously noted, only a third of all family businesses successfully make the transition to the second generation.
2. Alignment of family interests: Alignment of interests between current ownership and future ownership can be difficult. Structuring the transition so the new owners will be able to afford payments of the buyout to the previous owners is important.
3. Interfamily disputes: Buyouts can be structured to mitigate potential interfamily disputes. For example, if there are two business owners and one passes away unexpectedly, the surviving spouse is holding stock (and voting rights) but is not involved in the business. Will the business crumble? It can, but likely will not if proper planning is in place.
4. Balancing of financial returns: Creating a buyout agreement is challenging. How do you determine a fair price? Business owners usually believe their business is worth more than it really is, focusing on the balance sheet number and inflating it with all of their hard work. A better valuation model would be based on an earnings capitalization model, which is foreign to most business owners. Create a buy/sell agreement that is fair, reflective of the business value and minimizes taxes.
5. Estate and inheritance issues: These include taxation implications and potential probate delays upon the death of a family owner and passing along inheritance within the family.
Do not try to transition your business on your own. At a minimum, include your accountant and attorney through the financial tangle. They will assist your business in working through key issues, establishing a timeline and setting clearly defined goals and objectives.
Lance Barrett CPA, CGMA, CCIFP is the managing member and founder of Barrett & Company CPA’s in Camas. He can be reached at 360.210.5100 or firstname.lastname@example.org.