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This is the thirty-ninth in a series of informative monthly articles for North Carolina businesses from PNC in collaboration with BUSINESS NORTH CAROLINA magazine.
As head of Business Owner Solutions at PNC Private Bank Hawthorn, Charlotte-based Jim Benedict leads a team that is focused on helping business owners prepare for a crucial milestone: a business ownership transition.
When approached strategically, business succession planning is a multifaceted exercise, charted over the course of several years or decades. At the same time, a prudent approach to planning entails preparing for an unexpected transition that could occur at any time.
“Business succession planning isn’t linear, it’s circular,” says Benedict. “It’s much more dynamic than the transactional aspect of selling a business or passing it to the next generation. It’s about putting strategies in place to help business owners achieve their long-term goals for their business and family, while also preparing the business to successfully sustain a transition – either voluntary or involuntary.”
BEGINNING AT THE END
When helping business owners navigate succession planning, Benedict and his colleagues take the intentional approach of beginning at the end.
“We discuss with business owners and their families how they want to live their lives after the ownership transition – and how they view their wealth as a tool for attaining their personal, philanthropic and family wealth goals,” says Benedict. “These discussions ultimately help inform the development of a comprehensive plan, which addresses a multitude of considerations, from business and personal readiness to tax-efficient transfer strategies and estate planning.”
As Benedict explains, engaging in comprehensive financial planning well in advance of an ownership transition can lead to the implementation of strategies to help maximize the value of a business or provide flexibility when the time comes to negotiate a selling price or exit terms.
BUSINESS READINESS
While the circumstances surrounding each ownership transition are unique, one thing is certain, says Benedict. “Whether voluntarily or involuntarily, every successful business will have an ownership transition someday,” he says.
According to the Exit Planning Institute, approximately 50% of all business exits are involuntary, largely precipitated by one of the “5 Ds”: death, disability, divorce, disagreement or distress.
“While we may want to believe that business succession follows a structured plan or scenario, such as a negotiated sale, the reality is that many ownership transitions are unexpected,” says Benedict. “That’s why it’s important for business owners to take actionable steps to ensure their business is ready for an ownership transition today.”
Keeping the business’ financial house in order is a critical aspect of this preparedness. Among the actions a business owner can take include preparing audited financial statements, obtaining a “quality of earnings” statement and bringing financial reporting up to industry standards.
Preparing the business operationally is another key aspect of optimizing business continuity and post-transfer success. Among the actions owners may consider include retaining and attracting key employees; ensuring the business’ operating structure aligns with what is reflected in legal documents; protecting intellectual property; and scheduling an annual check-in with legal, accounting and tax advisors.
BEYOND THE TERM SHEET
Benedict is quick to emphasize that succession planning goes beyond preparing the business for a transition. Preparing the business owner for a fulfilling life, post-exit, is
just as important.
According to Benedict, personal readiness starts with understanding what a business owner and family need to maintain their desired lifestyle. “While the sale of a business can create a significant liquidity event, it’s important for business owners to ask themselves if their plan and portfolio can generate the cash flow necessary to support the lifestyle they want to lead,” he says. “Considering an owner’s business wealth often represents 80-90% of their overall net worth1, the importance of this exercise cannot be overstated.”
Additional personal readiness considerations include understanding the obligations to which an owner will be held and the impacts of a triggering event, learning how an ownership change will be taxed and having the right planning documents in place to facilitate a transfer.
Because succession planning is often accompanied by complex emotions and, in some cases, seller’s remorse, Benedict encourages business owners to give substantial
thought to their next chapter.
According to the Exit Planning Institute’s Readiness Survey, 75% of business owners “profoundly regretted” selling their business 12 months after finalizing the deal. Contributing to this regret are such factors as lack of purpose, loss of status or boredom.
“When running a business has been such a major part of an individual’s life for 30-40 years or more, it’s important for them to think about what the new meaning of life becomes once they move on from that business,” he says.
“Building a successful business is the work of a lifetime, and a solid succession plan gives credence to the brilliance of that work and legacy.”
1. Exit Planning Institute, Walking You Through the Perfect Exit, p. 6.
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