mythbusters

Busting the Four Myths of Business Transition Planning

Are your clients prepared for the next phase?

If you have clients who are business owners, many of them have likely put off creating a transition plan for the business, and they’re not alone.

According to a recent survey of 200 business owners conducted by Wilmington Trust, 58 percent of the respondents have yet to take this important step.

While it may seem like the last box to check, planning for the next generation of owners and managers well in advance usually leads to better operational, financial and tax outcomes. That remains true whether the transition involves a sale to an outside buyer, passing to the next generation of family or selling to employees. Business owners owe it to themselves, their families, employees and customers to plan ahead.

Myth 1: Planning for Business Transition Means Giving Up Control

When asked why they don’t have a long-term plan, 78 percent of business owners say it’s because they enjoy running their company, according to the recent Wilmington Trust survey.

Reality: Maintaining control of the company and transitioning ownership to the next generation to achieve tax savings aren’t necessarily mutually exclusive. Many entrepreneurs transfer their economic interest in their business to next generation family members for tax purposes while retaining control. In some cases, this may be done by transferring non-voting ownership interests or transferring ownership interests in trust.

Planning to convert one’s ownership interest to liquidity, however, can often mean relinquishing some degree of control to a new owner. Generally speaking, the degree of relinquished control will depend on the amount of liquidity that the current owner wishes to extract from the business. 

Myth 2: No Downside to Waiting

The second most-common reason business owners say they don’t have a long-term plan is that the event is too far in the future, with 44 percent citing this perception.

Reality: There’s no way to be certain when it will be time to transition the business. Illness, injury or death, for example, could unexpectedly leave an owner incapable of continuing to lead the business. At the very least, a short-term management transition plan is critical to address that contingency.

With respect to ownership transition, many owners ultimately give their business to family members, either during their lifetime or at their death.  If they’re high-net-worth individuals, however, there may be a significant transfer tax cost incurred on this transfer. By developing an ownership transition plan sooner rather than later, there’s a better chance of reducing this potential tax burden. This is because the effectiveness of many strategies for reducing taxes on transfers of wealth depends on early implementation. 

Myth 3: Running and Growing the Business Is More Important Than Long-Term Planning

The third most-common reason 42 percent of business owners say they don’t have a long-term plan is that they’re too busy.

Reality: There’s no denying that most successful business owners became successful because they stayed focused and kept their eye on the ball. But transition planning isn’t a distraction; it’s really another component of protecting and strengthening a hard-built legacy. In other words, transition plans help preserve the business and the wealth it’s created for retirement and future generations. Few things are more important.

While transition planning can require serious forethought and dedicated time, many business owners plan effectively by meeting with a team of experienced advisors on a regular basis over a number of years.

Myth 4: Transition Plan Not Necessary If Your Family Will Take Over Business

Forty percent of survey respondents cite this reasoning for failing to have a transition plan.

Reality: Business owners are fortunate if they have family members enthusiastic about taking over the business. But enthusiasm isn’t enough.

A robust transition plan includes long-term training and development arrangements for future leaders. It’s critical that the next generation of leaders is fully prepared when they need to step up so that the value of the business isn’t negatively affected by a lack of future management.

Comprehensive planning can also help maintain family harmony. Should family members have different goals and objectives with respect to the business, it’s generally better to uncover and address those issues early on. If left unaddressed until the issue is forced, typically in times of stress or crisis, even the simplest decisions can become acrimonious.

The Time Is Now

While your business owner clients may say they are too busy to start the process, they shouldn’t let unforeseen events dictate their business’ fate. Taking steps sooner rather than later will help them protect their families and their assets now and in the years to come.

 

Frederick Hopkins is Managing Director of Wealth Strategies and National Director of Business Owner Planning at Wilmington Trust, N.A.

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