Business succession planning: Building an effective team

The first step to a successful business succession plan is building an effective team of professionals. Much of a business owner’s wealth is often tied to their business, and their ability to monetize that wealth is likely to impact their financial security and lifestyle. A thoughtfully recruited cross-functional team may increase the likelihood of a successful succession plan, whether it involves a sale or another exit from the business for the owner.

This team will typically comprise the business owner, a financial advisor, a certified public accountant (CPA), attorneys (business and estate planning), a business valuation professional, insurance and risk advisors, and investment bankers and/or business brokers. The team should also include key members of the owner’s family as well as certain key members of the business’s management team. Each person on the team plays a critical role in assisting the owner get to the finish line.

Financial advisor

The financial advisor can play a crucial role in the process and can act as a quarterback for the client by helping bring together various resources to support the transition. A financial advisor can help business owners think through their financial goals, how the succession event may impact the feasibility of those goals and how those goals may change after the sale of the business. A financial advisor can be instrumental in providing guidance on investment strategies to support the long-term financial goals of the owner and will remain on the owner’s team long after the business transition.

CPA

The owner’s CPA can offer expertise and guidance in tax planning, financial analysis and compliance. CPAs can provide advice and tax-efficient strategies before, during and after the sale process. The CPA can analyze the financial health of the business and can identify potential areas for improvement, which ultimately help determine the fair market value of the business. The CPA can ensure that any succession plan complies with relevant tax laws, regulations and accounting standards while helping the business owner comply with all reporting requirements associated with the transaction. In addition, CPAs can conduct financial due diligence to evaluate financial risk and opportunities associated with the succession plan. A good CPA can help ensure a smooth transition of ownership while optimizing financial outcomes and minimizing overall tax implications.

Attorneys

Multiple attorneys will likely be part of the team and have different areas of expertise. Two of the most common attorneys on the team will be a business attorney and an estate planning attorney.

Business valuation professional

The business valuation professional is the person on the team who helps determine the fair market value of the business. There are various methods used to establish value; the method they use will be based on the type of business they are valuing. They work closely with other members on the team to analyze financial statements, industry trends, market conditions and other relevant factors to determine a valuation, which helps set the sales price for the business. They will also assist the estate planning attorney in valuing the business for estate tax purposes.

Insurance or risk advisor

Many of the risks associated with the transition of ownership of a business can be addressed through legal structuring (via the business or estate planning attorney) or through other planning (e.g., business continuity, disaster recovery), but some require different planning. Key person risk and liquidity risk, to name just two, are often best addressed through sophisticated insurance strategies. Working with other team members, a risk manager may also help business owners develop contingency plans to address unforeseen events or disruptions that could impact the succession process.

Investment banker/business broker

If the succession plan involves a sale of the business, the investment banker or the business broker will usually help facilitate that sale. They will often be responsible for evaluating market conditions, industry trends and other comparable transactions to determine the optimal time for bringing the business to market, working with the business valuation expert to determine an appropriate pricing strategy. They will market the business to potential buyers or investors and prepare materials such as an offering memorandum, presentations to highlight the business’s strengths, and other relevant information to solicit offers from qualified purchasers. They advise on various deal structures such as asset sales, stock sales, mergers, acquisitions, and the consequences of each type of structure, and negotiate the terms and conditions of the transaction on behalf of the owner. They also coordinate the due diligence process between the buyer and the seller to ensure that both parties have access to the necessary information and documentation to evaluate the transaction.

Family members and key employees

Everything a business owner does directly impacts his or her family, and a succession or transition plan will almost certainly have impacts across the family. Similarly, the sale of a business will almost certainly affect the employees of that business. Even if they aren’t owners, senior management can be helpful as the owner and his or her team work to carry out the transition strategy; communication with both the family and key business personnel can be a key to the long-term success of any transition plan.

The bottom line

Building a high-functioning, coordinated team, who are all collaborating and committed to a single goal, can be challenging. Assembling this team at the inception of the succession planning process may require significant time, effort and money from an owner. The difference between a business that sells at a premium versus a business that sells at a discount, versus a business that will never transition at all can – in many cases – be directly tied to the skill and effectiveness of the team that advised the owner in the planning process. Spending time, effort and money up front can potentially help drive more favorable outcomes in the end.

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