CHICAGO — While you’re juggling all of the tasks of running your shop, you probably know you need to be thinking of your succession plan. But there are nearly as many tasks to look at in putting together a successful exit strategy as there are to run your business.
Susan Rounds, Wells Fargo senior vice president, senior director of planning, business advisory services, addressed succession planning with GAAS attendees in a breakout session. She says the planning boils down to one thing: “It’s about anticipating change and using it to your advantage.”
There are three items today’s business owners — repair shop, parts store or any other business — including objective and expert advice, alignment of business and personal objectives and implementation with quality products and services.
“The world of business has gotten too complicated for any one single person to help with a business succession plan,” Rounds says. “You need advice that’s a mile wide and a mile deep. You need a team of people that’s going to check their egos at the door and walk through the options with you, so you can make the decision you want so rather than having your business change ownership by default, it will change by design.”
Now is the time to work on this, Rounds says. There are taxes and other rates that are at good levels of which to take advantage. For example, take advantage of the annual gift exclusion. Right now it’s $14,000; you can give away $14,000 of cash or business interests to any number of people. Also, the Applicable Federal Rate (AFR) is the interest rate you can use to sell your business to the next generation.
“The magic of that is, is because if the business performs at a clip that outsteps the AFR, all of that additional income goes to the family members free of transfer tax,” Rounds says.
Now is the time to look into this. The business owner needs to start taking some chips off the table and creating financial security. Rounds says owners also should take advanced of low AFR and other rates now and an uncertain future. Finally, consolidate ownership and buy out “non-optimal” shareholders.
“You need things that are going to address if the business owner has a reason they can’t continue managing…you want to establish rules of the road for family business, members coming in. you want to establish free market versus birthright compensation,” she adds. You need to keep your A-team in place and happy.
The Keep-Sell Decision
There are a lot of challenges both in value and taxes that owners are facing including, company vision, industry and competitive pressure, key management, family vision and value, personal tax, estate plan and tax, charitable considerations, fairness and community involvement, among several other considerations.
When you’re thinking about your strategic plan as an owner, you think first of where you are in the business (vision, plan and succession), followed by financing (retained earnings, debt, equity, etc.), talent (top players, demographics, corporate culture, etc.) and incentives (tied to strategy, rewards and risks, communications, etc.). While you’re looking at this strategically, you need to do so from a wealth team standpoint in terms of personal financial plans, income, rules for entry into the ownership and valuation planning, Rounds states.
Keeping Good Company
If you haven’t anticipated any of this yet, you’re not alone. Ninety percent of business owners agree that having an exit plan is critical, but only 33 percent have one. Rounds states that time, training and a team in place are the hurdles owners face. In regards to a team, only 29 percent of owners feel that their team of advisory is qualified to help.
“That mean 4 percent of business owners just closed their eyes, took a flying leap of faith and did it anyway,” Rounds notes.
And of those business owners who have begun a succession plan, resolving conflicts among family members who are in the business is one of their biggest concerns in creating, she explains. Maintaining family harmony is second just to achieving personal financial security, both of which are even more important than getting maximum dollar for the business, according to a Wells Fargo survey.
But now is as good of a time as any to start down this path, and become part of the 33 percent that have a plan.
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