Six Succession-Planning Conversation Starters

Failure to plan can kill a successful business. Or you can ask business-owner clients what’s important to them.

By Bryce Sanders

Business owners can be obsessive. Every waking moment is spent focusing on how they can build the business and make more money. This often takes a toll on their spouse and family members.

Let us assume you have one of these clients and they have survived those hurdles. Now their health is failing, and their biggest asset is … their business. What can they do to maximize the value of their greatest asset for the benefit of the next generation?

Before we look at ways to address this problem, let us look at the nightmare scenario of not addressing it. Your client owns a small business. Perhaps it is a graphic arts studio. They are a one-person shop. One day, they do not wake up. While the family makes funeral arrangements and grieves over the loss afterward, bills for the business and penalties mount up.

Meanwhile, people who owe money to the business disappear. Clients go elsewhere to get work done. A once thriving business is now worth almost nothing.

Now let us consider a second nightmare scenario. The business owner is the face of the business. They might be a top DJ or entertainer. They employ others, but everyone wants them. When they die, the value of the business dies with them. The headliner is no longer there.

Let us assume your client is healthy, but up there in years. However, they are very aware of the value of the business.

How can your client monetize their business while there is still time? Here are some options.

Bring in the next generation

This is the logical option. According to the Family Owned Business Institute, there are 5.5 million family-owned businesses in the U.S. Bringing in the next generation has been a standard business model for a long time. Family members are often brought up within the firm. They often serve as additional staff when needed and work their way up the ladder.

Sell the firm to the employees

The expression Employee Stock Ownership Plan (ESOP) is easily confused with Employee Stock Purchase Plan (ESPP). The first involves selling the business to your employees while the second is a benefit allowing employees to buy discounted shares in the public company where they are employed. Your client is interested in the first expression, the ESOP. This assumes your company’s employees could assume management of the company once the owner transfers their shares into an ESOP trust and is gradually paid off.

Merge with a friendly competitor

Your client and a fellow business owner have been friends for years. Let’s assume we are talking about two independent financial advisors, each with a separate client base. The two firms merge on the understanding your client will stay on for a while, assuring the transition goes smoothly, and then gradually steps back. The primary role of your client is to facilitate client retention. For this reason, your client is paid out over time, not immediately.

Go big or go home

You have heard stories about private equity firms buying up individual veterinary practices. Smaller local practices are bought up to create a national branded firm. You have heard about it happening in the independent financial advisor segment of the industry, too. Can your client sell their business to a firm scooping up smaller operations?

The value is in the land

Your client might obsess about the health of their business as it cycles between profit and loss. One way of valuing real estate is to imagine the property minus the business above the ground. Your client might own a parking lot situated on a piece of prime downtown property ideal for an office building. The value of the ongoing business might be dwarfed by the value of the land they own.

Train for the Olympics

Working with a business broker is another option. There are firms that buy and sell entire businesses. Some financial advisors might see “buying a book” as a way to get into the business with an established clientele. Now switch over to the business world. Some people want to own their own business, but not start from the ground up by finding each client, one at a time. They prefer to buy an established business. To get top value, your client’s business needs to be in top shape. Olympic athletes might train for years to compete in an event lasting only a few minutes. Your client needs to get their business into the best shape possible before it is valued.

Additional Reading: Help Business Owners Detect Financial Blind Spots 

Your client needs to think ahead. Think about the day when they are no longer around to focus on their largest asset, their business. They need to consider all options. You now have a few to get the conversation started.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” is available on Amazon.



Latest news

Parents of Sam Bankman-Fried Sued By FTX

Bankman-Fried ran FTX as a "family business" and misappropriated billions to benefit insiders, including his parents, the suit says.

Are Peak Treasury Yields Approaching? Some Investors Think So

They are buying into weakness, confident that a peak in interest rates will eventually lift the market for U.S. government debt.

Former Wells Fargo Exec Avoids Prison

She avoided prison time for her role in the bank’s sham accounts scandal after a federal judge sentenced her.

401(k) Losses Spark Lawsuit

Employees of the former Bed Bath & Beyond sued the investment committee, saying its "imprudence” caused them to suffer millions in losses.

SEC Chair Grilled By Senate Republicans on Advisor Rules, Climate Change

Some of the proposed rules that senators singled out concerned climate change AI use by investment advisors.

Embrace AI, Don’t Regulate It, SEC Commissioner Urges

Commissioner Mark Uyeda opposes a proposed SEC rule that he says would deter advisors from embracing the benefits of artificial intelligence.