For over 3 decades, I had been a practicing attorney focused on Estate and Trust Planning, Business Growth Planning and Business Succession Planning. More than 15 years ago, the course of my career dramatically shifted as I became involved in the financial services industry focused on wealth management and wealth succession planning for high-net-worth and ultra-high-net-worth business owners.
During that time, I witnessed countless numbers of family-owned businesses fail to survive past the second generation. Often, the overall wealth of a family that was created through decades of herculean effort evaporated because the founder of the business failed to properly plan for the successful transition of the business.
As I developed a broader view of the issue, I quickly became aware of the fact that literally trillions of dollars would transition from one owner to another over the next 20 years; with or without the current owner’s participation. Unfortunately, without proper, comprehensive planning and a coordinated team of experts, more than 75% of the transitions would cause the owner to “profoundly regret” the transition. You see, without proper preparation, 70% to 80% of businesses put on the “market” will never sell.
When you consider the absolute fact that 70% to 90% of a family’s total wealth is typically comprised of their successful family-owned business, you suddenly realize this is an issue of epic proportions in US business. And leaves many families vulnerable to financial ruin.
My ultimate goal for every client is to provide clarity in the understanding that their businesses are in “transition” whether they know it or not and whether they participate in the transition or not. You see, at that end of the day, there are two, and only two, types of transitions: 1) Planned Transitions; and, 2) Forced (Unplanned) Transitions. There are very few absolutes in life, but, one hundred percent of the time it is best to guide and steer the transition as opposed to being “dragged” by a forced transition.
To illustrate that point, while studying for my CEPA designation, the Exit Planning Institute confirmed what I had experienced during my practice of law. There are five basic scenarios that lead to forced transitions. Namely, Death, Disability, Divorce, Distress (financial and otherwise) and Disagreement among Partners/Business Owners. It was like being struck by lightning. I’ve watched firsthand from the sidelines while clients’ businesses were devastated by a forced transition that was the result of one of those scenarios. In my experience, not one of those “forced” transitions was what I would characterize as a “successful transition”. Some of those businesses “survived” the forced transition, but, it wasn’t easy. Every forced transition led to some combination of crippling debt, staggering death taxes, lost clients, family acrimony, forced
liquidations and a laundry list of other unnecessary business and personal nightmares. Nightmares that could have been avoided had the business owner made five critical decisions.
DECISION NUMBER 1: Acknowledge that Your Business is in Transition. Every single day that goes by takes you one day closer to the transition of your business. Benjamin Franklin is often quoted as saying “.. but in this world, nothing can be said to be certain, except death and taxes.” With all due respect to Mr. Franklin, please allow me to update that statement. Nothing can be certain except death, taxes and the eventual transition of your business. Once you acknowledge that your business is in transition, you can take the necessary steps to steer that transition.
DECISION NUMBER 2: Develop A Plan. While I am quoting the brilliant Mr. Franklin, let me remind you of one of his other quotes: “If you fail to plan, you plan to fail.” Don’t worry, I’m not suggesting that you make a plan to exit your business next week, next month or next year. I am strongly advising business owners to develop a plan that will maximize the value of their business WHENEVER and HOWEVER the business transitions. The plan I am referring to consists of defined steps you can take today to create real tangible value in your business. The kind of value that is beneficial to you today and, at least equally important, beneficial to the next owner of your business; whether the next owner is your family member, your management team, a private equity firm or an independent third-party.
DECISION NUMBER 3: Protect what you got! The first step in the development of your plan is the decision to protect what you’ve already accumulated. First and foremost in your plan, de-risk and mitigate the risk of loss on all fronts. There is a broad and extensive list of potential business and personal “creditors” to consider in your plan to de-risk. You can shift risk through the proper use of various insurance coverages. You can avoid or negate risk by having the proper documentation of business and personal agreements. You can assume risk that can’t immediately be shifted or avoided but you can plan to mitigate that risk.
DECISION NUMBER 4: Begin with the end in mind. Once you’ve incorporated a plan to protect what you’ve accumulated, make the decision to learn 3 crucial facts: 1) What do you have today; 2) What do you need in the future; and, 3) What does it take to close that “GAP”. Let me provide a little perspective on those 3 crucial facts. At some point, we’re all planning to slow down a bit. Golf a little more. Spend time with grandchildren. Travel the world. Retire. Retirement is personal. Personally, I can’t imagine retiring completely. It seems like I will always want to stay active. Contribute. Provide advice and help mentor the next generation of successful business owners. I may, at some point, want to slow down a bit; semi-retire as it were. To have a truly successful transition, you’ve got to create a plan for what you will do with your life once you exit (fully or partially) from your current business. Recent studies indicate that seventy-five (75%) of business owners deeply regretted transitioning (selling or otherwise) their business. It’s my position that they regretted the transition for two key reasons. First, they failed to create a post-transition plan. That’s right. They failed to create a personal plan for what they would do once they had transitioned their business. The personal identity of so many successful business owners is so closely tied to their business that when the business transitions, they are lost.
Second, they significantly underestimated how much income and investments they would need to support their desired post-transition lifestyle.
DECISION NUMBER 5: Get help. You simply can’t do it alone. You need to assemble a TEAM of well-qualified FIDUCIARIES to help you develop, monitor and steer your transition plan. You’ll notice that I capitalized two words in that last sentence; TEAM and FIDUCIARIES. It’s not enough to have a group of advisors assisting you. It is imperative that you have a TEAM of advisors with the appropriate qualifications, experience and a history with collaborating with one another to help you develop the most successful transition plan. Please don’t make the mistake of assuming that your current accountant, lawyer or consultant are appropriate members of your transition team. It’s possible and even likely that they can greatly contribute to the transition team but it’s more likely than not that they simply aren’t the best suited members of a transition planning team. On numerous occasions I discovered a successful family-owned business that had significantly outgrown the capabilities of their lawyers or accountants. It happens all the time. But to create the best transition plan, you need an A-Team. In my opinion, at least one member of the transition team must have earned an exit planning designation. In my experience, at least one member of the transition team should be a CEPA (Certified Exit Planning Advisor).
Finally, I could (and shortly will) write an entire book on the need to work with a team of FIDUCIARIES. Having practiced law for over 35 years, I fully understand the duties and obligations of acting as a fiduciary to a client. Unfortunately, the term “fiduciary” gets thrown around a lot by brokers, agents and financial consultants that simply are not, and legally cannot be, a true fiduciary to their clients. A true fiduciary has one goal in mind; the best interests of their client. Period, end of story. If you’re interested in determining whether your “advisor’ is a true fiduciary, drop me a note. Until then, I will leave you with one final quote that relates to the importance of true loyalty: “No man can serve two masters: for either he will hate the one and love the other; or else he will hold to the one, and despise the other..”
John H. Iannucci, JD, LLM, CEPA is the Founder and CEO of ILG Private Wealth, Inc., a fee-only registered investment advisor. ILG Private Wealth provides wealth management, exit planning and family office services to its clients. For more information about this article or to coordinate a meeting with John, send an email request to Pia@ilgpw.com