The pandemic environment is accelerating succession conversations among business owners. Especially for those who are hoping to secure the long-term success of their enterprise as well as their own financial future. In our respective businesses of mergers and acquisitions (Murphy McCormack Capital Advisors) and family wealth management (Morton Brown Family Wealth), we are seeing a sharp increase in entrepreneur clients say: “It’s time to sell.”
Why Owners are Selling Now
There are several reasons for an increase in urgency around succession. Despite the ongoing societal impact of COVID-19, the current economic conditions make succession a top priority for many businesses Those who weathered the past 18 months well may be in a better financial position than they expected. Buyers are abundant and well-capitalized with roughly $3 trillion in private equity seeking opportunities. Lenders are also showing a willingness to finance deals both large and small.
These are all positive developments for potential sellers. However, owners are also worried about challenges on the horizon, like the possibility of higher taxes, higher interest rates, or inflation. It makes sense then, that a business owner’s three-year succession plan might be pulled forward into 2021.
Taking the First Steps
Racing ahead with succession without a thoughtful plan can be fraught with risk. When a business owner asks for help, we will often offer the same refrain: We will first help you prepare, then help you sell the business. It is the planning and preparation that is frequently overlooked. If key people are not in place or the growth trajectory is not strong, then racing to lock in a lower tax rate might create more problems than it solves in transition.
On the personal side of a succession plan, it is our experience that a significant minority of owners have done any personal financial preparation or business financial planning for a transaction. Just like in their day job, they are the key person in their financial life. There may be a team of professionals who all see part of the picture, but they lack the coherent plan that could guide decision making through the most significant financial event of their life.
Tips for a Successful Transition
With the stakes high, and the timeline getting shorter, here are four tips for business owners who want to prepare their business and their family for a successful succession:
- Don’t avoid planning because you might have to change the plan. The great is the enemy of the good. Sometimes entrepreneurs can be paralyzed and not start the process of preparing because the conditions or timing are not quite right. The truth is that the timing is never right, and the conditions are never perfect. The plan will not be exact. The goal of preparation in succession planning is not to predict an ideal outcome, it is to set the conditions for success in any number of circumstances.
- Confidence about your future is better than fear of the unknown. Owners should be focused on building confidence in their unique future. Fear about higher tax rates might create a flight instinct for an owner who is inclined to sell. But confidence in the next stage of life is a necessary counterweight for successful transition. This is where an experienced professional team is invaluable. An experienced business coach, investment banker, and financial advisor has been through this before and can build confidence about what lies on the other side of business ownership.
- Professionally and personally, the less it is about you, the better. The key people in a business, outside of the owner, are the critical link to any succession plan. If the strategy and execution of the business are dependent upon the owner, then the value of the business will not achieve its potential. An advisory team can provide an important, frank assessment on this key question: Is the business ready to succeed without you?
- The same is true of a personal financial plan. If it is all in one person’s head, it doesn’t count. There are other stakeholders: Spouses, children, charities who could all benefit from intentional planning. Well in advance of a succession plan, owners should be focused on developing relationships with the right advisors and having the right conversations.
- Have a contingency plan. Succession in your business will happen, sometimes not on your terms. For instance: an illness, an unsolicited offer, a passing of a key leader. The list can go on but having a well-designed contingency plan for succession that considers the organization and the personal financial plan is critical.
Every year in our work, we provide numbers and models that help savvy business owners navigate complex situations. When it comes time for succession, the numbers become secondary to a well thought out business plan and financial plan.
Dennis Morton, CFP®, ChFC® is a Co-Founder and Principal of Morton Brown Family Wealth. Dennis can be reached at email@example.com or 610-709-5072. Robert J. McCormack, CVA, M&AMI, MBA is the Founder and Managing Partner of Murphy McCormack Capital Advisors. Bob can be reached at firstname.lastname@example.org or 570-524-7253. Morton Brown Family Wealth is a Registered Investment Adviser and is not affiliated with Murphy and McCormack Capital Advisors.