Keeping it in the family may not be best choice, preparation is key

[caption id="attachment_25439" align="alignright" width="250" caption="Jay Silverstein and Mike Musson"][/caption]

NORTH BAY – While many owners of family businesses may want to hand down the business to the next generation, the better plan may be to sell to someone in the business or an outside interest.

Jay Silverstein, senior manager at Moss Adams in Santa Rosa, said in this economy a business often will not be able to be handed down to the next generation, and a sale is the only option.

“In this climate, people are more willing to look at the alternatives of leaving the business to family,” he said.

He said it is about the ultimate survival of the business, which is why spending money now on succession planning means looking at the future benefits.

But, said Mike Musson, audit and accounting partner at Linkenheimer CPAs and Advisors, “You can’t establish value in your business unless you are training someone to take your place. You should be identifying your successor early on.”

He said it is more typical for people to do that in large companies, but in small companies, where many people have no upward mobility unless someone leaves the company, there is not a lot of early identification for a successor.

“In a lot of small businesses, everybody thinks that everybody below them is an idiot,” he said. “But remember, you can’t move up unless you have a competent person to replace you.”

Don Williamson, CPA with Zainer Rinehart Clarke for more than 20 years, focuses on business valuation. He said only 30 percent of family businesses last more than one generation.

“The business either folds or is sold to an outside party,” he said.

There may not be anyone in the family with the interest or the ability, he said. And the biggest problem in that case, or in the case of a family business wanting to get an exit strategy together, is finding the proper person to step into the leadership role or to set the business up to be desirable to sell.

“Often, a business is successful because of the person who owns the business,” Mr. Williamson said.

It may be that it is just about the relationships the owner has with his clients or vendors or his place in the community, he said.

“A unique way of doing business marketing, in one sense, is not just making the business profitable for you,” he said. Often when someone starts a business, it is a person offering a service and that person trying to get themselves out there.

“That one person is the business, and when it comes time for that person to retire, there is no value to sell.”

He said the value of the business is not established unless there is someone training to take over the helm.

“Asking yourself if anyone wants your business is a good plan,” he said. "The company may not have value without the leader.”

While figuring out a succession plan, a big picture assessment is crucial to the business, Mr. Musson said.

“Succession planning in a vacuum is not going to get you anything,” he said.

That is why he recommends bringing in expert consultants.

“The value of a consultative relationship with a banker and lawyer and CPA can make a huge difference in the success of a business. Even if they disagree, it is not bad to hear the other side.”

When getting a business ready for a sale, branding is a key factor, said Mr. Williamson.

“It is critical to the business that there is an established identity and that the promotion is of the business not the people in charge. If you ask most people about their accountant, they will tell you a name, not the name of a firm, but the firm is what you would want them to think about if you have a business you are thinking about selling,” he said.

Once the valuation is worked out and it is time to come to a buy/sell agreement, it is important to figure out how the former owners will factor into the picture.

The former owners can often help out and be of use to the new owner if they come on as an employee, and often there is some sort of long-term equity involved anyway, Mr. Silverstein said.

“They may have no say in the actual decisions being made, but they still have both a monetary and emotional interest in seeing the business succeed,” he said.

And, Mr. Musson said, if the former owners are still around, or at least do a lot of on-the-job training with the new owners, you can assure the people staying that the business will continue to be strong and assure the vendors and clients that the level of the relationship will remain high.

Ultimately, the succession plan is a process not a destination.

“When this thing turns around, be the business that is in a position to grow and thrive,” said Mr. Musson.