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Planning for the Handoff

He knew it wasn't going to be easy: A few years ago, William Bourke took a deep breath, looked his new client in the eye, and asked about succession plans for the small manufacturing business the man had started 20 years before. The owner waved away the question, explaining that he had it covered his two sons, already in the business, would assume the reins. But Bourke, who runs the Bourke Financial

He knew it wasn't going to be easy: A few years ago, William Bourke took a deep breath, looked his new client in the eye, and asked about succession plans for the small manufacturing business the man had started 20 years before.

The owner waved away the question, explaining that he had it covered — his two sons, already in the business, would assume the reins. But Bourke, who runs the Bourke Financial Group in Atlanta, politely, but firmly, persevered. How, exactly, would he turn the company over to them? What if he died before they were ready? How would they pay for it?

Over a period of six months Bourke kept hammering away, then the payoff came: The owner agreed to buy a multimillion-dollar life insurance contract to provide his sons with the money to buy out his ownership stake from their mother, plus a deferred-compensation plan and disability and long-term care benefits for a key employee. The total premium came to about $350,000.

“You have to be willing to challenge people,” says Bourke. “Succession planning is an art, not a science.”


It goes without saying that all business owners will someday have to leave their companies. With luck, they'll do so by handing the firm over to someone they not only trust, but who will pay them handsomely. Seems pretty obvious. Yet, for most small-business owners, careful planning of whom to turn the business over to and when to do it is just about the last thing on their minds.

“Typically, the person who built up the business plans on dying in place,” says Doug Charney, senior vice president of Charney Investment Group of Wachovia Securities in Harrisburg, Pa. But if you keep at these folks, there's gold in them thar hills — before, during and after a transition. From life insurance policies that help fund a sale to investing the proceeds, advisors can reap many rewards from smart succession plans. But even if you don't stand to make much money from the change, transition planning is a service you have to address, if only as a way of establishing yourself as a trusted part of the business.

If you have any doubts about approaching small-business owners about their succession plans, consider this: About 50 percent of companies with $5 million to $500 million in revenues have at least one owner 50 years or older, according to Ned Minor, an attorney with Minor & Brown in Denver. The clock is ticking for these owners

“We're going to see trillions of dollars freed up as these people sell out,” says Minor. “And financial planners want to be in a position to help them make the decision, go through the sales process and be there to help them invest.”

Why are small-business founders so reluctant to face facts? For one thing, addressing the issue of whom to pass the firm to means tackling matters of mortality, not something most of us like to look in the eye. Complicating matters, owners tend to have little time for anything beyond running their operations.

Then there's this intangible: For many founders, their business is much more than a source of income. “They treat it like their firstborn child,” says Minor.

That attitude is OK — until they can't work anymore. “As they get older and their health isn't what it used to be, all of a sudden the business goes down with them,” says Charney. He recalls a small engineering design and manufacturing firm, run by the founder. Despite the warnings of Charney, the owner's wife, and his CPA, the man refused to hand any control over to his daughter, who worked in the business. Eventually, she got fed up and left, but the owner still wouldn't bring in another engineer as an heir apparent. When he reached his 70s, his health started to deteriorate and he simply couldn't run the business the way he had before. Result: He closed up manufacturing operations and sold the plant, drastically reducing the value of the company. While he's still running the show, “He will have no choice but to close the doors when he can't work anymore,” says Charney. “It's a nonsellable asset now.”

Relating such real-life scare stories often is the only way to force a small-business owner to deal with the issue of succession.

You can also call in the client's attorney, accountant or other advisors, for reinforcements. “You get together a team,” says Gregory Large, a managing partner with Lenox Advisors in New York. That goes for times when you're having trouble with your client's spouse, as well. Large recalls the wife of a small-business client who became so distraught whenever he tried to broach the subject of succession, she had to take anti-anxiety medication. Not only did the issue mean discussing her husband's death, it also involved making decisions about how to handle their two children, one of whom wanted to join the business, the other who didn't. Eventually, Large called their attorney, who invited all of them over to meet. With the attorney's help, Large painted such a vivid picture of the disaster that could befall the woman were her husband to die without a succession plan that, “the anxiety about that became greater than not talking about it,” says Large.

They were able to put together an agreement in which one child would become a partner, the other would inherit a trust, and the wife would get income from another trust, but wouldn't have to be involved in the day-to-day running of the company.


When you're finally able to talk turkey, then you'll end up addressing one of three likely scenarios: selling the business to the owner's children, to key employees or to an unaffiliated outsider. Most small-business owners begin with the assumption that they'll pass the business on to their kids or trusted employees. In reality, however, according to Minor, that's not as common as you'd think.

How come? Often, the owner's children or key employees don't want to take over, or aren't up to the job.

“Entrepreneurs are different kinds of human beings,” says Bourke. “A key employee or a client's child may not be the kind of risk-taker the company needs.”

For family members or employees who want to take over, one of the most common financing tactics is for them to pay with a promissory note. That's workable, as long as they can swing the payments.

“The business must make enough money to permit the buyer to do that,” says Daniel Reagan, a rep and insurance agent with Fleischer Jacobs Group in South Burlington, Vt.

He remembers a client who bought a music store from the owner with an I.O.U., only to sell it back when he couldn't run it successfully. Another often-used financing approach is for the company to give bonuses to individuals in the firm, which can be used to buy back the business and also provide the owner regular income after he or she has left.

For advisors, however, there's also a big downside to cases in which an owner plans to sell to a family member. Should there be a disagreement among relatives, and you bet on the wrong horse, you can wind up losing the client.

“The trick is not to get involved in the politics,” says John Reddish, a business-succession consultant at Advent Management International in Drexel Hill, Pa. “Present the best case based on the facts.”

Still, there may be times that's not possible. Reddish remembers the owner of a manufacturing firm who had brought his two sons into the business about 12 years before. But, to Reddish, it was clear the sons weren't interested in doing much for the business, other than selling the property and becoming real estate investors. Rather than get in the middle, Reddish resigned.

If the plan is to sell the business to an outsider, then your client needs to do things to make it appealing — and keep the value up. While that's a risky proposition, there are some steps you can take to increase the odds of success — building up a customer base with lots of repeat business, for example.

Then there's the issue of partnerships. In theory, they're easier to deal with, since the other partner can take over. In reality, a partnership complicates matters, especially if one person dies unexpectedly. That's because, without a written arrangement, the partner's spouse or children can step in and assume control, even if they don't know anything about the business.

Once you and your client have come to some agreement, that's just the beginning: Expect the owner's plans to change and to revisit the arrangement regularly.

Bourke recalls one small-business owner who balked when it came time to turn the company over to his daughter, and decided to stay at the helm.

“If they change their minds, then you'd better be there to make the adjustments,” he says.

Three Ways to Succeed

The pros and cons of each type of business handoff.
Selling To Pros Cons
Key Employee •People you know and trust.
•Able to groom before handoff.
•Might not be able to afford buyout.
•Might not be cut out to run company.
Family •Keep business in the family.
•People you know and trust.
•Might not be able to afford it.
•Familial resentments and rivalries.
Outsider •Better price in good times.
•Ties to firm severed — fewer worries.
•Worse price in down times.
•Buyer an unknown quantity.
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