LIFE
The Spectrum of Succession Planning A successful business transition requires planning and collaboration in order to meet the client’s objectives. By Sam G. Torolopoulos and Dennis M. Axman
C Just as with insurance and financial service agencies, owners are aging out. The tail end of The Greatest Generation want a great retirement and boomers are looking to trade in their hard work as a springboard to the next phase of their lives. It’s up to you to help clients make the most out of what might be the most significant asset in their lives and secure their future. But it’s a growing field of sellers out there in an era of ever-tightening credit requirements. This guide will help lay out a plan. The Spectrum of Succession Planning Every business has a unique path to succession. Your job is to blaze that trail. PAGE 32 How Businesses Can Pass the Torch without Getting Burned You know how few family businesses make it from generation to generation. Here’s how you can help clients to beat the odds. PAGE 34
Close Trap, Open Opportunity Key employees and unlock the value of a business for a transitioning owner. But the usual tactics of retention can have their unintended consequences. PAGE 36 32
orporate transition planning is quickly becoming one of the critical topics of our time. Baby boomer business owners are reaching retirement age at an ever-increasing rate. Their children are not nearly as eager to take over the family business as the boomers were when they took over the business from their parents, the World War II generation. Complicating this dynamic are the emerging and changing credit, estate tax and global economic markets. Combining all these factors make transitioning the ownership of a privately-held business an uncertain proposition at best and a scary one at worst. A successful business transition must be done in a way that best accomplishes a number of goals. They include: meeting the owner’s personal motives, allowing the owner to have a clear understanding of their future management role, and providing a reasonable replacement income from reinvestment of the selling proceeds, even if those proceeds are received over time. At the beginning of any retirement or estate tax planning discussion with a business owner, the issue of value inevitably will come up. Rarely will clients be content to “take a salary for life” and leave the business equally to their children at death. Business owners often will do this because they believe there is no other option. Even if this is the case, we all have seen the unintended estate tax and ownership transfer consequences that this option brings. What many business owners intuitively know, but spend little time contemplating, is that their company has many
InsuranceNewsNet Magazine » October 2013
values on the same day. For example, the business may have: Orderly liquidation value: sell the assets, pay the liabilities and close the doors. Investment value: the value a non-working owner will pay to own a company that is part of a portfolio of companies. Fair market value: based on valuation rules put forth by the Internal Revenue Service for charitable, gift and estate tax transfers. Market value: the value a private equity firm or competitor might pay for the company. Synergistic value: the value a publicly traded company might pay in order to take advantage of market synergies or vertical integration. Business owners should understand that they choose the value world in which their business will trade, and that choice is based primarily on their motives. The business transfer spectrum depicted in the accompanying chart shows the many options that exist when transferring the equity interests from one generation to the next. At the top of the chart, we see the business owner’s motives. This represents the first and most important decision that the business owner has to make. Attempting to make a recommendation of a transfer method without determining the business owner’s motives often will result in a breakdown of the overall planning process. Ultimately, this will lead to a breakdown in trust toward the advisor who made that recommendation. It also is important for the business owner to know that the value conclusion reached will generate cash flow sufficient to meet his or her personal financial goals and objectives. Business owners might be willing to