As a massive wave of Baby Boomers enters retirement age, the landscape for privately-held businesses may be poised for a seismic shift.
Recent research has shown that more than $10 trillion in boomer-owned business assets will be passed down or sold by 20251. However, according to the 2015 US Family Business Survey conducted by PricewaterhouseCoopers, only about 27% of private businesses have done any exit planning whatsoever. Even fewer have a documented hand-off plan in place, which may leave them vulnerable to events which could force a hurried sale2.
According to Matthew Shafer, a Financial Advisor and Senior Investment Management Consultant for Morgan Stanley, succession planning is one of the major challenges facing family-owned businesses today—even ahead of labor costs, finding qualified employees, foreign competition and health care expenses.
“Unfortunately for many unprepared business owners, as this wave of business transactions gets going, it may create a ‘Buyer’s Market’ in which only those who have planned well will experience a successful exit.”
Shafer, who focuses on business succession planning, points to practical and emotional factors that keep business owners from succession planning. From a practical standpoint, business owners are usually more focused on profitability, growth, and customer satisfaction on a day-to-day basis. And emotionally, their identities are often so closely tied to their businesses that they simply don't want to think about giving them up.
But this delay carries significant risks. Without proper planning—which can be done even before the owner is ready to sell—business owners may find themselves forced to sell quickly due to a cash crisis, economic downturn, split with a partner or a family dispute.
“Compare it to selling your house," Shafer says. “If you have to sell your house under duress, you'll likely have to take less money for it than what it's worth. The same is true of a business." A troubled sale could also have considerable implications on your livelihood post-ownership, damaging your retirement plans.
“Another consideration is losing control of the business before you want to," explains Shafer. “To entrepreneurs, the business is like one of their kids. How they exit can significantly affect their lives. If it isn't done right it can have serious ramifications, including emotional stress and depression."
There is no one-size-fits-all succession plan. Making sure it's “done right" and tailored to financial goals should be a primary concern.
Shafer often asks: “In a perfect world, what does your next stage of life look like?" Some business owners want to continue to play a role in the business even after it's sold. Others want to leave it entirely. Still others start a new business or focus on philanthropy.
Other concerns include determining the actual worth of a business and taking steps to maximize it. From the moment an owner decides to sell, the focus should be on making it more attractive to potential buyers. This includes addressing “curb appeal" issues—replacing faulty equipment, upgrading technology as well as making sure that company policy and procedures are well documented—and seeing that the business meets industry standards.
"You want potential buyers to be confident that the business is in great shape," says Shafer.
Above all, the critical step in business succession planning should be forming a team of experienced advisors—a Financial Advisor, a banker, an attorney specializing in estate planning, an insurance agent and a valuation consultant. According Shafer, lack of access to adequate advice is another key reason business owners wait to plan an exit strategy.
“Get some smart people in a room to do some discovery," Shafer suggests, and do it at least two years before you're planning on exiting the business. “Tell them about your business and your goals and get their advice for getting there.”
Your Financial Advisor is a good place to start. In addition to being one of the professionals that can assist you, he or she is also well positioned to communicate your exit strategy to other stakeholders, especially as it relates to your personal objectives.
Once your team is in place and your exit strategy is created, your Financial Advisor can also work with you to craft the most critical element of your wealth management strategy: Planning a detailed wealth management strategy that lets you enjoy the fruits of your hard work building a business.
Whether you are contemplating transferring your business interest to family members, liquidating assets, or selling your share of a business to current management or a third party, talk with a Morgan Stanley Financial Advisor today and start the conversation about your business succession plan.