Business Owners Need to Focus More Time on Transition Planning, Survey Says

While most business owners realize the importance of transition planning, most say they are too busy running their business to think about what’s going to happen to it in the future, according to a new survey report from Wilmington Trust and a team of academic advisors, “The Power of Planning.”

The researchers surveyed more than 200 owners of privately-held companies and found that 58% admit they don’t have a transition plan—despite the financial risks of not planning.

In many cases, their business is something they have spent their lives building, and in other cases, they are stewards of the business that their parents or grandparents might have built, says Matt Panarese, president of Wilmington Trust’s Mid-Atlantic region and head of the firm’s national business owner practice group. Many owners were the beneficiary of some sort of transition, yet they, themselves—nearly six in 10—have done very little to ensure the same kind of transition and ongoing planning.

“It’s understandable—they are focused on what they can control, which is running the business,” Panarese said in an interview with Chief Executive this week. “But so many business owners put off planning for a transition because it’s likely to be far in the future, and will wait to plan until doing so is a more pressing need.”

However, nearly half (47%) of the survey respondents age 65 or older still do not have a transition plan in place. Yet 67% of all respondents said getting older is the top reason for creating a plan, followed by providing security for their family (55%). Rounding out the top five reasons to have a plan are: Meeting the valuation goal—36%; reducing tax—35%; receiving an offer from a potential buyer—22%.

“First and foremost, business owners should think about what transition means to them.”

When embarking on a transition plan, Panarese emphasizes a number of best practices for business owners.

“First and foremost, business owners should think about what transition means to them—they need to wrap their heads and hearts around how they view the future of the business,” he says. “There can be obstacles: many business owners would like to transition the business to existing management or the next generation of family members. But in many cases, they don’t have the right kind of management or a suitable family member who can effectively take the business into the future. They need to be very honest with themselves about who could take on that responsibility.”

The two most important transition goals cited by survey respondents were “ensuring the company remains viable in the long-run” and “taking care of employees,” both cited by 87% of respondents.

Coming in a close second was “ensure your customers are taken care of” at 85%. In third place, at 83%, was “financial security for you and family.” Concern for family, employees and the company continue to round out transition goals, with respondents citing the following motivators: ensure your company retains value—78%; maintain family harmony—58%; keep the business within the family—39%; pass control to employees—28%.

Valuation is a top concern for business owners, according to the survey. Two-thirds (67%) believe that they have a very good idea of their company’s worth, but two-thirds of them also want to talk to an expert about valuation.

“The other thing to focus on is understanding the value of the company, which is a critical component of establishing a robust transition plan,” Panarese says. “It’s important to get an accurate and objective valuation, whether the objective is to maximize the value of the business—for either transfer or sale—or groom the next generation to take over.”

The survey also explored perceptions of business owners about selecting transition advisors. The majority of owners listed tax expert (84%), lawyer (83%) and accountant (83%) as the top three most important advisors. Other top advisors include legal trust expert—65%; banker—45%; investment advisor—40%; family business consultants—14%; executive coach—14%.

A key component to transition planning is making sure business owners surround themselves with the right kinds of advisors, Panarese says.

“Research has yielded some interesting information about who business owners rely on as their key advisors,” he says. “We would include among these bankers, attorneys, accountants, wealth advisors to help them with estate planning, and investment bankers to help with the valuation discussion.”

It’s critical to have the right advisors who have experience and understand at a very intimate level the family dynamics of a privately-held family-owned business, Panarese says.

“These advisors know you can’t separate the family from the business and the business from the family. In many cases the business is the primary asset of business owners and their families,” he says.

There also are different kinds of valuations that advisors can provide and the distinction is important, Panarese says. Investment bankers can help with the market value, tax attorneys can help with valuation for estate tax purposes and estate attorneys can help structure the proper strategy to protect the value of these assets in the event of a transfer or sale.

Why don’t business owners act and how do you get them to act? Panarese says his team spends a good deal strategizing on how best to accomplish this.

“It’s important for us to get them to think about how much time they’ve dedicated to building and growing the company, and then ask them, wouldn’t it be wise to spend just a fraction of that time thinking about the options available to them? We also get them to think about what might go wrong without a specific plan,” he says. “These are ways we can help them act.”