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Business Succession Strategies

Don’t let your small-business-owner clients become a statistic; now is the time to help them plan for the transition.

By Janet C. Arrowood

The failure rate for privately held businesses is phenomenally high. According to the National Federation of Independent Businesses, only about 50 percent of small businesses make it through the first five years. According to the Small Business Administration, only about 30 percent of family-owned businesses survive to the next generation, and only half of those that make it to the second generation make it to the third generation. These statistics are positively scary, but they also provide ammunition you can use to introduce the strategy of business-succession planning to your business-owner clients.

Successful business owners tend to be very busy and unwilling to talk about next week, let alone next year or 20 years from now. Then along comes a divorce, a family squabble, a death, disability, retirement or an unsuitable heir, and the business is on the road to ruin. What can you do to get your clients talking, listening and moving forward with succession planning?

If no succession planning is done, the IRS, heirs, lawyers and any co-owners will take over.

Getting clients into a succession planning state of mind
There are many elements of a business-succession strategy. The details are different for each business, but the basics are the same. The most important thing is to get the owner to acknowledge that at some point he will leave the business, through retirement, sale of the business or death. At that point, someone else takes over, or the business has to be sold or liquidated. This can be a smooth transition or a bumpy disaster. If no succession planning is done, the IRS, heirs, lawyers and any co-owners will take over. This is when businesses get sold at “fire sales” or simply fade into oblivion. To avoid this, now is the time to discuss these elements with your clients:

  • When they want to leave the business
  • How they want to leave the business
  • To whom they want to leave or sell the business
  • How to fund transfers, sales, retirements and disability
  • How to avoid family discord

The key questions
The exit strategy is the most important element and the one business owners are often least willing to think or talk about. Often they see the business as an extension of themselves. To step back and devise a means to retire, transfer, sell or terminate the business is not something the business owner wants to do.

A key question to ask the business owner is, “Who do you envision running the business when you are no longer willing or able to do so?” Follow this question with, “Do you want to be in business with your ex-wife? Your co-owner's adult children? The new husband of your daughter?” Without adequate succession planning, any of these scenarios is a very real possibility.

Another question to ask is, “Where do you see yourself in five, 10 or 20 years?” Follow this with, “How do you envision reaching that goal? Where will the money come from?” Frankly, unless business owners begin grooming their heirs to take over years in advance of the expected transition, the heirs are very unlikely to be competent to run the business. Matters are complicated further when heirs have no interest in running the business. Since a business is often a large part of the owner's estate, the heirs lose much of their inheritance if there is no orderly transition plan in place. Even worse, many small businesses can't be passed to the heirs unless the heirs are licensed or otherwise qualified to own or participate in the business. Case in point? Your own financial services practice!

Key planning elements
Succession strategies include a number of things. The main ones are:

  • A shareholder/partnership agreement and/or
  • A buy-sell agreement
  • A means to fund the agreement(s)

A shareholder/partnership agreement is a key document that details the need for a buy/sell agreement, and excludes ex-spouses of owners, (ex)spouses of the owners’ children and others from demanding a share of the business interest. This exclusion is critical in the event of a divorce, since the ruin of a successful business often comes in the guise of a demand from the (ex)spouse for a share of the business or a portion of its revenues. Having a properly executed shareholder/partnership agreement, signed by the owners, spouses and other parties (such as adult children), eliminates many potential succession problems.

If no succession planning is done, the IRS, heirs, lawyers and any co-owners will take over.

As the financial advisor, this is also your opportunity to build on your professional referral network. You are not the person to draft the agreement, but in your network there should be several attorneys who can handle the job.

The buy/sell agreement normally addresses the details laid out in the shareholder/partnership agreement. This is the document that covers the conditions and criteria for selling or transferring a business interest such as:

  • Who can receive or buy the interest
  • What will trigger the transfer or sale of a business interest
  • How death, disability and/or retirement of an owner will affect or trigger succession activities
  • How the transfers or sales will be funded
  • How the business will be valued

Funding the agreement(s) is the hard part, but it is also where you can have the greatest success. For most business owners, once they face the succession planning issues, they have to come up with a way to cover their obligations to buy out their partners’ interests or fund the transfer to a third party. The least expensive and surest way? Life insurance, disability income insurance and cash values (to provide pension payments).

A key question to ask the business owner is, “Who do you envision running the business when you are no longer willing or able to do so?”

Why even bring it up?
Business-succession planning is essential for your clients’ peace of mind, continuation of their business, tax reduction and getting maximum value out of the business. It also avoids crises in the family and among owners. With the right succession strategies, your clients can avoid family discord and business problems and ensure the continuation of their legacy—their business.

Janet Arrowood is the managing Director of The Write Source Inc. She can be reached at


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