Pass It Forward

By Ilene Denton August 31, 2012

Pass it Forward

Let’s face it, the vast majority of small-business ownersare too busy managing the day-to-day to step back and address strategic larger issues—say, planning for the time they’ll retire. Yet succession planning is taking on greater significance as the boomer generation ages.

At a succession planning seminar that CPA Rob Lane, managing shareholder of Kerkering, Barberio & Co., recently led for members of the Sarasota and Manatee Manufacturers Association, he stressed the pervasive nature of the subject. “There are 79 million baby boomers, and 10,000 are turning 65 every day for the next 18 years,” he told them. “We’re going to have this massive drain of ownership, of leadership. So succession planning is pretty significant.”

It’s understandable that business owners want to put off that intimidating subject. “One, it’s complex,” says Lane, “and two, it deals with your own departure. Some people create companies and sell them, and they love that. There are others who are head of a second-generation company, and they don’t know what to do.”

Yet, “Most people view succession planning as something to do when retirement is near,” Lane says. “Unfortunately, at that point, it may be too late.”

Don’t be that business owner whose only succession planning consists of a “spousal letter,” he cautions—the kind of letter that states, if something happens to me, here’s what you do with the business, i.e., call this banker, call this CPA, call this lawyer. “That’s a fire sale,” he says. “It’s not a tragedy, but it’s close to it.”

Lane suggests each business owner ask himself or herself some fundamental succession planning questions:


Rob Lane - “An important part of owning a business is taking enough out so that you can diversify.”When do you want to leave your company?

Where are you in your work career, and do you want to work where you are until you retire? If the answer to that is yes, do you want to retire in five years? Ten? “Start with the end in mind and work backwards,” counsels Lane.

“Most buyers are looking to buy a business as investors. They’re not looking for a job, and they want to buy a company with strong operating systems and management that will stay in place when you leave,” Lane says. That means you need time to develop the next generation of company leadership. Human nature being what it is, it’s very hard for some entrepreneurs to give up that responsibility to the next generation. “It’s that difference between investing in the future and what can I make today,” Lane says. “If you want to leave in a year, that’s a lot more challenging than in five years, especially if you’re the chief cook and bottle washer.”

The good news is that people are buying businesses again, says Lane. “It comes down to understanding what people buying your business value. Time gives you the opportunity to build the systems and the value drivers that will keep making your company more valuable.”

Lane himself is the product of his company’s succession plan. “At Kerkering, Barberio, one of the things we’re doing in our 40th year of business is we’re very actively helping to grow the next generation,” he says.

What post-sale income, in today’s dollars, do you need to achieve financial security?

Step back and ask yourself how large a nest egg you’ll need when you retire in order to live the way you want to. “An important part of owning a business, throughout its history, is taking enough out so that you can diversify and not solely depend on your business,” says Lane. “So look at what you have in your home, your 401K, etc. You might need a financial adviser to advise you on issues such as, ‘Are my spouse and I ready to sell our home? What’s our estate plan? If we have a daughter in the business and a son not in the business, how do we treat them fairly?’”

To whom do you want to sell or transfer the business?

Family, key employees, outside parties, co-owners, partners (which is the case in a lot of professional service firms)? It’s an emotional issue, especially if you’re involving the family.

“One question some owners are blind to, for example, is, ‘Are their children capable of running the business?’” Lane says. “The percentage of companies that make it to the third generation is extremely small.” And there’s another risk in selling to a child, he says: “They probably don’t have the cash to pay you. You’re probably going to take a note, so your future retirement is at risk to the future success of the business.”

Or you may have a key employee who feels he or she can run the business, but doesn’t feel he or she has the respect of your son or daughter. A good way to test key people, Lane suggests: Turn over leadership without turning over ownership. “Some business owners do that by expanding into a new territory, or stepping away from a key function, like sales management,” he says. “If someone passes that test, then you may consider selling the business to them.”

And if you don’t, you win anyway. “Quite frankly,” says Lane, “having a strong leadership team is going to help you directly by being able to sell to [your key people], or indirectly by giving you a stronger valuation on your company.”

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