Owners of closely held businesses need to start planning five or even 10 years in advance if they hope to avoid complications when it’s time to turn the business over to other family members or maximize value for a sale to outsiders, according to experts who participated in a Sept. 25 event covering business-succession strategies.
The forum “Who’s Next?” was designed to help business owners understand what they need to do to prepare to exit their businesses.
“Historically, when you would ask business owners what do they expect to do with the business it was about a 50/50 mix — give it to the family or move it on to someone in the family or sell it to outsiders,” said Andi Gray, founder of the consulting firm Strategy Leaders Inc.
Gray was the keynote speaker and moderator of a panel featuring Joseph R. Bodan, a partner at accounting firm PKF O’Connor Davies; Nicholas S. Marra, senior vice president and regional manager for Webster Bank; and Gregory W. Kearney, senior vice president and financial consultant at Webster Bank.
Gray noted that what actually happened was not always what the owners had intended: only about 15 percent of businesses actually got to the second-generation family members and about 5 percent subsequently got to the third generation.
“While 50 percent thought they were going to get the family engaged, it didn’t happen so much,” she said.
Gray cited figures from the Estate Planning Institute that about 20 to 30 percent of the businesses going to market actually are selling right now.
Bodan suggested that how the business is structured can make a difference in its attractiveness to potential buyers. He said that consideration should be given to being an “S” corporation because you don’t know whether the deal is going to be selling assets or stock and you might be able to avoid the double taxation that can come from being a “C” corporation.
Where small-business owners hurt themselves is in not surrounding themselves with the “right” people who have needed expertise, according to Marra. “The right people change as your business changes. There’s no one right person that’s gonna take you from inception to selling, but the key to the equation is in paying for the right information when you need it to be successful,” he said.
In Kearney’s view, “Business owners actually have to sit down with a licensed planner or somebody that they’re comfortable with to go through what is it that they want from the business. Do they need a cash flow? What is it they want to go to beneficiaries? Do they just want to leave a legacy? Do they want to leave money to charity? Do they want to minimize estate taxes? How to you take assets out of an illiquid business? How do you turn that into a cash flow down the road, through trusts, etc.?”
“Information is the key,” Marra said. “That idea of game planning and goal setting has to start sooner (rather) than later. By the time you’re ready to sell, it’s too late. There are too many things that have to fall into place and then it becomes more luck than skill, and I for one don’t want to depend on luck. I’d rather know where I’m headed and what that outcome’s gonna be.”
The presenting sponsors of the noontime event held at the Whitby Castle in Rye were Webster Bank and Westfair Communications, publisher of the Westchester and Fairfield County Business Journals and WAG magazine.