Succession Planning Offers Unlimited Growth Potential
BY: John P. Napolitano CPA, CFP®, PFS, MST
Each time that I read some published reports about all of the small businesses in the US and I reflect back to all of the business clients that I have served as a CPA and then as a financial advisor, I ask myself. Why don't I or any other respecting financial advisor make a career exclusively out of succession planning? The vast majority of baby boomer wealth is held as stock in over 12 million privately owned businesses. Over the next 10-15 years, 70% of those are expected to change hands. When you look at the total picture you quickly realize that without a plan the small business community may be headed for disaster.
It is estimated by professional colleagues that I work with that as many as 90% of all business do not have a complete or proper succession plan. By complete and proper, I mean documented, fair, funded and current.
Many business owners may have legal documentation that was drafted to cover their buy/sell issues and then left it there. Being legal doesn't always make it the right agreement, the right structure or a comprehensive succession plan that truly covers all parties. I've met clients that think they have a buy/sell funded with insurance on each other to find out about lapsed policies or insurance owned for a redemption agreement with the legal document set up as a cross purchase agreement. Your role is to investigate the document and determine if it will do what the parties need it to do.
What is fair to both sides and the business? As the survivor, you may feel that the valuation set 10 years ago is fair today. But to the decedent's family, that may be grossly unfair. Guess what? It doesn't matter if the document is inherently unfair it may still be legal and binding. You also want to ensure that the document takes the best interests of the business into account. Can the business continue to function if one partner is unable to do their job while still receiving a salary?
If you run into the client who can't afford a plan or doesn't want to spend the money, just move on. Why would you persist with someone who doesn't want what you have to sell, even if it is the best way to fund these agreements? I find that the most underserved need is the disability coverage for a working shareholder. This can be a real drain on the business if you have to continue to pay the disabled working shareholder and also replace their services with another employee. On the life insurance side, the key issues are amount, type, duration, ownership and beneficiary of the policy(s). These issues require careful assessment as they are very commonly off track.
The only way to determine if the agreement is current is to review it or talk to the creator of the document, presumably the clients' attorney, and see if the agreement still makes sense. Factors to consider include the valuation formula, the shareholders of the entity, their employment status and anything else that materially impacts the effectiveness of the agreement. The issue most often in need of help is the valuation. Most agreements call for a fixed valuation or a market value based on a formula that may or may not still make sense.
You will find it rare that a business owner is ready and interested in talking about death, disability or retirement when they are busy running a business. Since the business owner is not the best way to advance, well then who do you ask? I'd ask the gatekeeper.
The gatekeeper that I speak of is which ever advisor the client looks to for business decisions. This is different for every client, but is commonly the CPA or attorney. With a targeted search, I'm sure you can find at least one careless or negligent gatekeeper who, with a wake up call, will realize that their clients need help. Instead of finding one client you may find that a solid relationship with the right gatekeeper can deliver great success to your practice.
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