WSJ Voices: Patrick Ring, on Helping Business Owners Make Succession Plans

Wall Street Journal Blogs: Wealth Manager
January 23, 2013
Original Source

Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Patrick Ring is principal of Legacy Partners in Baltimore.

Many financial advisers’ core competencies don’t include business planning. As a result they view clients’ businesses as illiquid assets that provide regular cash flow. But I’ve also noticed that business owners tend to be so involved in running their business that they don’t think about an exit plan until it’s too late.

Often it takes an outside consultant to ask two crucial questions of business owners, which their financial adviser might have overlooked: how are they going to get out, and what will they do afterward?

Eventually every business owner is going to either have to sell the business to an outside buyer or create a plan to keep the business in the family. Both courses of action can take years of planning, and each course requires a different set of solutions. So it’s important that business owners start creating an exit plan long before they are ready to leave or they pass away—whichever comes first.

If the client decides they want to keep the business in the family, my primary concern is trying to remove assets from the business before the succession takes place. For example, if the company owns both its equipment and real estate, I’ll move the real estate under the owner’s name.

There are a few reasons for doing this. First, reducing the business’ value makes it possible to gift it to the next generation with fewer tax consequences. It also ensures that owners aren’t dependent on the business for income once they are no longer the owners. I’ve heard of children who fire their parents once they inherit the company, even if the parents rely on the business for income.

If the client decides to sell the company, there are a few important ways they should prepare. They should focus on improving cash flow and improving prospects for growth. If the owner has investment properties, cars or boats on the business’ books, it’s time to get them out of the business. It’s also time to get rid of any part of the business that isn’t contributing toward the bottom line—even if downsizing is painful.

It’s also important for the owner to put management in place that can continue to run the business without them. Since many owners are the heart and soul of their businesses, this can be a difficult and time-consuming process.

And finally, business owners need to know what they are going to do once they leave the business; otherwise all that planning is likely for naught. Many buyers will tell you that it’s common for sellers to back out of deals at the last minute because they aren’t emotionally prepared to sell.

The bottom line is that business owners shouldn’t wait for their first heart attack to start planning their exit strategy.