With the value of a business typically comprising more than three-quarters of a business owner's net worth, securing maximum value when passing the business along is critical to that client's retirement security. Here's how top pros manage a complicated process.
Any producer who has dealt with a successful business owner learns very quickly that there is a complex, emotion-filled relationship between most business owners and their businesses.
Often, the successful business is the owner's "pride and joy," something that he or she has built through years of sacrifice and dedication. For the successful owner, not only has the business been the financial engine that has provided for his or her family, but in many cases, the family is also working within the business. And in many other cases, the employees and customers of the business feel like family as well.
On top of all that emotion, add the fact that the successful business can have substantial tangible value as an asset, but only to the right family member or right buyer.
As the business owner plans for the succession of the business and weighs the myriad of important decisions about his or her legacy -- a successful business -- what role does the producer play and how does he or she play it well? To answer those questions and others surrounding this complex specialty area, I posed a series of questions to a panel of top producers: Wayne D. Minich, CLU, ChFC; Ryan F. Platt, MBA, Certified Special Care Planner; and Robert A. Wright.
1. Charles K. Hirsch, CLU: Could you briefly describe how you came to make business succession planning such an important part of your business?
Wayne D. Minich, CLU, ChFC: Our process can be described as "exit strategy planning" rather than "succession planning" because the client may want to sell the business and move on, not necessarily retire. The demographics are the compelling factor. Specifically, here are some facts according to recent studies:
o One-half of business owners today are older than 50, according to Roger Winsby, president of Axiom Valuation Solutions.
o The average age of people selling businesses is 56, according to the International Network of M & A Partners.
o One out of every two company owners plan to sell their businesses during the next 10 years, according PriceWaterhouseCoopers.
o Only 22% of owners of businesses with sales ranging from $5 million to $150 million of revenue have done significant exit strategy planning, according to PriceWaterhouseCoopers.
Therefore, there is a tremendous business opportunity for our firm over the next 15 to 20 years, at least.
Ryan F. Platt, MBA: As my practice has grown, I have come across individual planning clients who own businesses. As I began my discovery process, I saw that business owner after business owner had no strategy for transforming their businesses into income streams to fund their retirement when they are done working. I realized that the value of their business is, many times, 90% of their net worth, and it is critical that they have a strategy that uses the business value for their future benefit. I began helping those clients devise business succession strategies as part of their overall financial plans.
Robert A. Wright, MBA: As I have worked with business owners over the years, the question that always came up in our conversations was this: How were they going to be able to maximize their retirement when they would retire from their business? In many cases, they had an interest in seeing that their children who worked in the family business would be the majority owners of the business going forward. Some wanted to let their key employees become the new owners. Others were merely interested in how to proceed to be sure that they would get the best value from an outside third-party buyer. By getting the correct answers to those questions, I was led to focus my practice for the past 15 years on business succession planning and estate planning.
2. Hirsch: What are the major issues that are affecting business succession planning in a positive way at the present time?
Platt: The economy has been difficult, and many smaller business owners have felt extremely squeezed. This negative economy, as well as increased global competition, has forced many older-generation owners to realize they may not be able to simply exit the business by selling it for the price they need or by leaving it to the next generation while enjoying a payment stream as the next generation slowly buys the business. Because of the current economic situation, business owners are beginning to open their eyes to concepts and ideas that protect their major asset -- their business -- so they can turn that asset into cash when they want to retire. These business owners realize it is critical to keep and hire highly talented employees because it is these employees who will help the business owner ensure that he or she can transform the business into a retirement income stream.
Wright: Without question, the current low Section 7520 interest rates have been very favorable for gifts to children, charitable planning techniques, family loans, or the sale of a business to an Intentionally Defective Grantor Trust (IDGT). Also, the valuation discounts on leveraging techniques, like a FLP (Family Limited Partnership) have been very favorable.
Minich: There are significant strategies that can be implemented that enable a business owner to minimize the taxes on transferring the business, thus enabling that person to increase the amount of money he or she receives post-sale.
3. Hirsch: What are the major issues that are negatively affecting business succession planning at the present time?
Wright: The uncertainty as to what the estate tax will be and possible substantial changes to many strategies currently in play. Business owners are also unsure about the ramifications of policies that will be promulgated by the current administration and that uncertainty consequently has many business owners procrastinating on making decisions. Also, the recent downturn in the economy has decreased the business value of many business owners to a lower level than what they were anticipating and in some cases to a level that they will not accept. They are waiting on the business climate to change to a more favorable level to get an increase in their business valuation.
Minich: The major negative issue is the economy. Specifically, there is a lack of capital available from traditional sources to finance the sale of a business to purchasers outside the business.
Platt: Interestingly enough, the same negative economy and global competition issues that I mentioned earlier are prohibiting the business owners from taking action to secure their businesses because of cash flow restraints and business slow-down. The business owners clearly see the issues facing them in regards to their exit strategy, and they understand the steps they need to take; however, cash flow is very tight.
4. Hirsch: Many of the producers I know who are working in this market talk about the importance of working well with their clients' other advisors, like attorneys and accountants. No doubt that's an important skill for success, but for many producers, it's much easier said than done. Do you have any thoughts to share on how to most effectively work with a client's broader financial team?
Minich: By positioning ourselves as Exit Planning Professionals, we are able to help coordinate the advisory team. Without question, this involves the accountant. It also may involve the client's business attorney; estate planning attorney; a valuation specialist, who is key; a business broker or an investment banker, depending on the size of the deal; a banker; and perhaps a business or management consultant. To achieve the owner's exit objectives, a team is absolutely necessary because no one professional has all the answers. Diverse skills and talents are necessary. Just as important, a team approach minimizes time and cost if properly facilitated and led. Our position is to help the owner create a road map -- a written exit plan. Assuming you have team members who are willing to work together on a timely basis, the team uses the road map -- an action item checklist -- to keep on task.
Platt: My advice is to communicate immediately. I always have the client provide my team the contact information for all of his or her advisors, including accountant, attorney, insurance agent, financial planner, stockbroker, etc. I will then ask the client for permission to contact these advisors. I start with the accountant, because as we all know, for most of our clients the accountant is the most trusted advisor. I want to ensure that the accountant knows me, knows the work I am doing, and is part of the process.
Wright: In my practice, it is important that, at the outset, I get the client's other advisors, such as the attorney and accountant, involved, as do most producers who focus in this arena of planning. Where perhaps I differ somewhat is that, after my fact-finding meeting with my client, I get permission to meet with and discuss the situation with the client's main advisor. I then meet with that advisor and share with him or her some techniques and strategies that I'm thinking about recommending to the client and share why I'll be making the specific recommendations. Only after the other advisor signs on with my recommendations, do I take the next step of sending out a letter of recommendations to my client and any other advisors. We then set up a joint meeting to review the recommendations in depth with the client and get approval or disapproval on each separate recommendation. For each client-approved technique, we then set up an action list of things to get done, which specifies who is responsible for what and includes a timetable, established by the client, which shows a date by which each item must be accomplished. This process moves the case towards completion and keeps everyone on track.
5. Hirsch: What's the best practical idea you've instituted recently that has had a positive influence on your efforts in business succession planning?
Platt: Another planner and I recently have initiated a relationship with an accountant. This relationship has started slowly; however, we are beginning to see this accountant call his clients and schedule meetings for us in his office. We expect this relationship to pay big dividends in the second half of 2010 and in 2011.
Wright: In the past four years, I have been recommending that my business owner clients draft what I call their Strategic Contingency Plan 
(click here for a copy). When a business owner dies, even the perfect plan does not usually include steps on what will happen at their business the day after the death of the business owner. I call this "the process to prevent roadkill of the business." To initiate the process, I ask the business owner, "If last night you became part of a Mack truck grill on the local interstate highway, what happens this morning in your office when the calls start coming in?"
These are the kinds of calls I ask the business owner to think about:
o The business owner's banker will call, wanting to see whoever is now going to pay off the outstanding business loan.
o Customers will call, wanting to know who now will take care of their orders.
o Vendors will call, wanting to know whether they should still fulfill the order requested just yesterday.
o The business owner's own employees will call, asking whether they should come to work today and whether they will still have a job.
With the Strategic Contingency Plan in place, there will be answers for what the owner wants to take place in order to take care of these kinds of inquiries.
Minich: There are actually three ideas that are critical in exit strategy planning:
o The owner absolutely must promote the value of the company through the use of value drivers. Of those, having a solid management team/successor(s) is imperative whether the company is being sold to outsiders or insiders.
o If the company is being transferred to insiders, getting "minimum value" for the business and using custom-designed retirement plans, deferred compensation plans, or both enable the seller to transfer the business at substantially lower cost and yet still get the amount he or she wants for the business.
o The seller must retain control until the final check clears if he or she is selling the business over time to insiders.
6. Hirsch: What's been the most personally gratifying aspect of your own work in business succession planning?
Wright: First, the client's warm, thoughtful "thank you" is priceless. Second, when I work with the client's advisors and then those advisors call to put me in touch with one of their other clients, I find it rewarding in itself because I know that they are seeing that my process, "The Wright Approach(TM)," does work. Third, this market enables me to focus my time on using my unique ability to work with business owners so they can at least be informed about their options. By exploring options, they can see what is available to them so that every credit, deduction, exemption and waiver in the Internal Revenue Code is at least explored to see whether it is an option they want to consider to minimize the taxation of transferring their business.
Minich: The most personally gratifying aspect of exit strategy planning is the intellectual challenge. It is a jigsaw puzzle that requires thought, effort and creativity to lead to a successful conclusion.
Platt: It is most gratifying to me to help family businesses successfully navigate the emotions of transferring the ownership of a business from one generation to another. We all know that money can have a strange effect on people, and family businesses are no different. The concern for me is that families can be divided and destroyed because of a lack of planning and communication. It is always my goal that the business can continually be successful and that family holidays are always inclusive and enjoyable.
7. Hirsch: Any further thoughts?
Minich: Yes, there are a couple of issues that are critically important to understand:
o There must be a process for the sale to proceed smoothly.
o Many business owners are under the impression that selling a business is like selling a house. They assume you stick a "For Sale" sign out in front and somewhere within six days to six months -- in a normal market -- the business sells. But preparing a business to sell for maximum value to the seller can sometimes take two to three years or longer.
Wright: Many business owners have an interest in not only ensuring that they max out their business valuation and consequently their own retirement cash flow, but also perhaps, ensuring their own legacy in their community. Some also want to be sure that, in addition to passing on their business to the next generation, they have passed on their family values to the next generation. As a consequence, many business owners have made part of their planning incentive provisions in their wills and trusts to enhance and reward the next generation if they do certain things. This is where they get a chance to move from a level of business success to a level of significance, which is very rewarding to many business owners.
Wayne D. Minich, CLU, ChFC, is a 34-year MDRT member with 12 Court of the Table and two Top of the Table honors. He is president of Applied Financial Concepts Inc. in Richfield, Ohio, where he specializes in financial planning, wealth accumulation, management and transfer strategies, retirement plan design and installation, and executive compensation design.
Ryan F. Platt, MBA, Certified Special Care Planner, is a financial planner with Hinrichs Flanagan Financial in Charlotte, N.C. While earning his MBA, Platt worked as a corporate executive, developing and implementing strategic plans. With seven years of experience, Ryan continues to assist businesses in their planning efforts, while at the same time helping individuals create and implement their own comprehensive financial strategies. Platt became a Certified Special Care Planner in 2005. He holds series 6, 63, 65 and 7 securities licenses and is licensed in long-term care, life and health insurance products.
Robert A. Wright, MBA, is president of Wright & Company in Lafayette, Ind. He has been a MDRT member for 38 years, and he is currently a member of the Top of the Table and the International Forum. Wright has extensive experience speaking at industry meetings, including the MDRT Annual Meeting, LIMRA meetings, and Columbus Life's Advanced Forum. Wright has both BS and MBA degrees from Indiana University and an MS from St. Francis College.
