Business Succession Planning

Contents

1. Two transfers inside one handoff
2. How many owners have a plan
3. Why owners put it off
4. The questions that come before the documents
5. Heirs who run the company and heirs who do not
6. A plan for an exit nobody chose
7. Nebraska farms and small towns

Brent O’Mara works with business owners and multigenerational families, work that often reaches past the portfolio, into business succession on one side and tax strategy on the other, and into how a business sale is structured. The standard beneath the subject is older than any survey about it. A CNBC report summarized a succession plan as an exit strategy in its essence, one meant to let the current owner, or that owner’s heirs, cash out at a fair value under stated circumstances, and in many cases to let the company keep operating once its founder has retired, died or become unable to work.²

Two transfers inside one handoff

Extension educators describe the handoff as two separate transfers. Purdue Extension defines the process as addressing the transfer of ownership and the transfer of management together, with financial well being and risk assessment folded in.⁹ University of Missouri Extension draws the same line in different words. The transfer of ownership is a legal, tax and finance matter, which the program calls cut and dried; the transfer of leadership carries the knowledge, management capacity and social standing a new owner needs, and the program notes that the first matters most to the retiring owner while the second matters most to the town.⁷

How many owners have a plan

The counts vary with the survey. An online legal services provider polled small business owners in August 2017 and found that 72 percent had no succession plan for their companies, and that 87 percent did not know a will could be written specifically to cover a business.⁶ A consulting firm’s survey of family companies the same year, reported by the Journal of Accountancy, found that just 23 percent had a robust, documented plan, although 68 percent had one for at least some senior roles.³ Even owners who have planned are not sure of it. A national trust company found in 2020 that only 54 percent of owners with a written transition plan were highly confident the business would survive the handoff, according to CNBC.¹

Figure

What a 2017 survey of family companies found

had a robust, documented succession plan

23 percent

had a plan for at least some senior roles

68 percent

had no succession plan at all

29 percent

of leaders were reluctant to hand over leadership

46 percent

Why owners put it off

CNBC’s reporting on advisers who specialize in the work lists the usual reasons. Some owners never expect to retire fully, some have not come to terms with their own mortality, and some are avoiding a hard choice, such as whether a grown child or a longtime employee should take over; one planner interviewed for the piece said owners have to decide whether they want things to happen by default or by design.² Research from the University of Minnesota, cited by the Missouri program, sorted rural owners’ barriers into three groups: no conversation about why planning matters, obstacles of money, time and confidentiality inside the process itself, and a shortage of local help with the eventual sale.⁷

The questions that come before the documents

Most published guidance begins with questions rather than forms. A USA Today column lists five: whether the owner is ready to give up control, whether any of the children can run the company properly, who could run it today if the need arose, how much financial security the owner needs from the sale, and what the business is likely to look like over the following five, ten and twenty years.⁵ Determining what the company is worth usually follows closely, and buyers tend to trust a number prepared by an objective third party, which is why how a business is valued has its own entry here.²

Figure

Four questions a national trust company puts to owners who say they have a plan

1. 01
   WrittenIs the transition plan documented somewhere outside the owner's head
2. 02
   SharedHas the owner told the people who are named in it
3. 03
   PreparedHave those people been given time and training to take over
4. 04
   RevisitedHas the plan been reread to see whether it still fits the current circumstances

Heirs who run the company and heirs who do not

Where several children will inherit, the published advice converges. The Wall Street Journal says many advisers tell an owner to put the controlling stake in the hands of whichever heir will run the company, leaving noncontrolling shares to the rest of the family.⁴ The USA Today column warns against splitting ownership among siblings who have no interest in the business and points to estate planning and life insurance as the usual ways to treat the others fairly.⁵ The Journal of Accountancy’s account of a Tennessee canning company founded in 1908 shows what a larger family did at its third generation handoff: a board with outside directors and a family council to carry each branch’s views to it.³ The price and the buyer are often fixed in advance by the buy sell agreement, which has its own entry.

A plan for an exit nobody chose

The same column makes a point the surveys bear out: an owner’s unexpected death or incapacity is far more likely to cause chaos in a company than a planned retirement, so a succession plan doubles as a continuity plan.⁵ CNBC’s 2015 reporting describes advisers checking whether an owner carries enough life and disability insurance and drafting employment agreements that keep a salary flowing to an owner who can no longer work.² Its 2020 reporting, written during the pandemic, found owners asking the same question in a new tone, namely who would run the business if they were sick.¹

Nebraska farms and small towns

In Nebraska the subject is taught as farm and ranch transition. The University of Nebraska’s Center for Agricultural Profitability maintains a succession hub that groups its material under legal tools, finance and taxes, family communication, land and leasing, and the emotions of a handoff, and it runs Nebraska Land Link, which pairs retiring landowners with beginning farmers who want a successor relationship rather than a sale to a stranger.⁸ The family business in Nebraska entry covers the wider setting. The Missouri program reports the stakes for a small town: when a rural business is sold rather than closed, the new owners told researchers they hired more people and grew the customer base.⁷

The limit of the subject, stated honestly, is that a written plan supplies none of the things it depends on. It cannot produce a willing and capable successor, it cannot create the cash flow that lets a child or an employee pay for the company, and it cannot make an owner ready to let go. What it can do is record a set of decisions early enough that the family, the employees and the eventual buyer are not meeting them for the first time in a crisis. Which route fits is a question that depends on a person’s circumstances, and one for qualified professionals rather than a general rule.