Is Your Succession Plan in Place?

YOUNGSTOWN, Ohio – The new HBO television series “Succession” tracks the lives of Logan Roy and his four children as the aging patriarch, played by Brian Cox, fights to maintain control of his media company. Power struggles ensue between father and children as politics and money come into play.

It’s a work of fiction. But the reluctance to step away from a business is a familiar plot line, says Tim Petrey, managing partner at HD Davis CPAs, Liberty Township.

“People’s businesses are their kids. They’ve invested time, blood, sweat and tears into their business,” Petrey says. “It’s not easy to walk away from it.”

To avoid a situation like the one facing the Roy family, a company must have a succession plan to ensure a smooth transition, he says. The owner must commit to letting go and the new ownership to learning about the company and its processes.

“Everybody needs to be on the same page in terms of the goals,” Petrey says. “Expectations need to be clear. If all those things aren’t there, it doesn’t work.”

Succession plans are coming more to the forefront among business owners, although the level of urgency “isn’t quite where it needs to be,” he says. While more business owners in their mid-50s to early 60s are starting the conversation, Petrey says, “It would have been really valuable to start that conversation 10 years ago.

“The plans that are difficult to implement are the ones that are like, ‘Okay, I want to retire in a year or two years,’ ” he says.

A study by the Florida-based HR Exchange Network finds that about half of businesses have a formal succession plan in place. Baby boomers own and operate 2.34 million businesses that command $5 billion in sales and employ 24.7 million. By 2022, $3.7 trillion in business assets will change hands, the organization reports.

An estimated 1,000 boomers will retire daily for the next 15 to 20 years, says John Cournan, principal at Packer Thomas, which has offices in Youngstown and New Castle, Pennsylvania. Annual revenue for the firm’s business clients ranges from $1 million to $500 million, with most in the range of $25 million to $75 million, Cournan says. CPAs at Packer Thomas work on as many as 30 succession plans annually, he says.

“It’s something that’s very important to everybody, but it’s particularly important to small, privately held businesses,” Cournan says. “Some people die in their chairs then let other people come in and try to figure out how to run it.”

Succession isn’t always handing the reins of a business over to the next generation of a family. As was with HD Davis, leadership can be passed to key employees. For five years, Petrey worked closely with the firm’s founder, Harold Davis, and learned as much as he could from Davis’ institutional knowledge. Transferring an entire life’s knowledge in a few years “is a difficult task,” Petrey says, but is critical for a successful succession so the next generation doesn’t repeat past mistakes.

“Just think of all the different scenarios that they’ve learned, all the hard lessons,” he says.

Petrey estimates he was able to skip 10 to 15 years of business-owner growing pains. Staffing was one of the key lessons he learned from Davis, who stressed being “slow to hire and quick to fire,” Petrey says, a lesson that’s put the company in a position to expand.

“I wasn’t planning on leaving for a little while, but [Petrey] was just so successful and people were gathering to him,” Davis says. “And he brought in some great people.”

Davis and Petrey agreed to a seven- to 10-year plan that would move Petrey into more of a leadership role while Davis stayed on to help with larger projects. Davis had no trouble letting go, he says, adding that the goal of being a business owner is to own it and not be in it.

“I’ve always been good at delegating,” Davis says. “When you own a business, the goal is not to work your life away at the business. The goal is to work on the business, not in the business.”

That sentiment is echoed by Daniel Rossi, president and founder of FEIC Financial Inc., Youngstown. Owners who work in the business usually compare succession to selling their house, he says.

“Most owners consider the company they own to be their job, not an investment. That is a major mistake,” he says. “A lot of them end up deciding ‘This is the time,’ and then the can of worms is open and they didn’t realize all the work it was going to take.”

A business owner can’t hide the fact that he’s aging, Rossi says. This makes key employees nervous if no succession plan is in sight because “everything they have is basically invested with their employer,” and they don’t know what’s going to happen next. “Once the employees start leaving because they’re fearful of that, then the business loses its ability to continue,” he says.

Having an exit strategy with a business continuation plan creates “golden handcuffs” that financially incentivize employees to stay with a company and possibly assume a leadership role, he says, including a 401(k), deferred compensation and employee stock option plans.

Additionally, a succession plan covers unforeseen circumstances, such as an owner taking ill or dying. Not having a plan in place to fill business-critical roles can leave a company vulnerable to probate, he says. Rossi recalls an instance when an outdoor-equipment retailer didn’t return from a hiking trip.

“Months went by and nobody ever found him,” Rossi says. “By the time those months went by and they started the probate process of the estate, the business had fallen apart.”

Plans must spell out precisely how a business owner wants the business to continue, from who ends up in charge to how much the owner’s family receives in the event of his death, he says. Even a sole proprietorship could require a complex plan because sometimes “there is no separation between the owner’s personal assets and the company’s assets,” he says. In probate, the entire business can be liquidated leaving the family with nothing.

Continuity plans designed by FEIC include a gap analysis to quantify the difference between the company’s value and the owner’s personal value based on investments and financial planning. It’s important because “there’s so much equity that gets buried in a business over the years,” and the owner doesn’t realize it, he says. An appraisal is executed to determine the “nonbookable things” that aren’t always included in the sale price of the business, such as the company’s customer list.

“What if 20% of those customers would leave if they know that the owner is no longer running the company?” he says. “These are the real risks of business that changes the value of the company.”

Economic forces could affect the value of a company as well, says Packer Thomas’ Cournan. If an industry is in rapid consolidation, owners may want to “pack it up” before the business loses value, he says, citing industries like waste management, ambulance service and equipment rental as examples.

According to the waste industry group, Waste360, industry mergers and acquisitions totaled $1.26 trillion over the last three years, with this year expected to be even busier. Consolidation has led to industry dominance by Waste Management Inc., Republic Services Inc. and Waste Connections Inc.

“If you have a large company and there are market forces that could render the business worthless in three to five years and you miss that, you might find yourself going out of business in five years when a large competitor moves in next door,” Cournan says.

Cournan recommends working closely with industry trade associations to identify trends as well as key players and who they’re acquiring. This will determine if “you are at risk of being acquired or diminished,” he says. Businesses in danger could contact the large players about acquiring their company as an exit strategy, he advises.

In addition, Cournan suggests establishing a strong management team to improve a company’s value. The best way to determine a company’s management strength is for the owner to take a vacation, he says.

“See how many times your phone rings. If the business keeps humming along, then it’s probably set up well. And it means you can also sell it for a more favorable price.”

Copyright 2022 The Business Journal, Youngstown, Ohio.