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Passing the torch: Readiness and transition planning ensures ongoing success


by Thomas J. Taricaniimage of passing keys from one hand to another

You climb onto an airplane and, before departure, the flight attendant instructs you and your fellow passengers on actions to take in the unlikely event of an inflight emergency. The routine is intended to instill a sense “readiness” if something were to happen and of calm as you, the traveler, that a plan is in place.

Like the crew on an airliner, successful business owners need to plan for circumstances that may arise as they build their company, as the company matures and as the owner looks forward to passing the enterprise along to others.

Approximately 62 percent of privately held companies will transition to new ownership over the next 15 years. Fully half of all transitions are unexpected, attributed to the five Ds: death, disability, divorce, distress or disagreement.

Having a well-thought-out readiness plan in place provides a necessary foundation for the transition of business ownership for privately held companies. It increases the likelihood that the owner will be able to unlock the firm’s value at the right time or successfully transfer the business. A readiness plan also reassures employees, suppliers and customers that the company is ready to deal with an unplanned event while staying focused on its future.

Five things a business owner needs to know

When completed, the readiness or transition plan should address five key points:

  1. Our business is positioned to succeed without key principals and that appropriate individuals are empowered in writing and prepared to lead if something unexpected occurs.
  2. We know roughly the value of our business and how it will likely be transitioned, monetized or closed.
  3. We have a strategy to enhance the value of the business, including maximizing the 2017 tax cut opportunities. (A 20 percent tax deduction for “qualified business income” was implemented for many businesses, including real estate. You’ll want to talk with your financial advisor to determine how the new tax law impacts your company.)
  4. Incentives are in place and communicated to ensure the key management team’s commitment to success.
  5. The ongoing financial support of the owner’s family and heirs aligns with the business’ ability to generate income.

After you have addressed these five questions, it’s time to take a closer look at the kind of ownership transition you want for your company. Will it pass to family, your in-house management team, a third party or some combination?

Family transition

You may think the line of succession is clear, but it is critical that you address the succession plan with your family and management team to ensure they implement your desires. You need to consider:

  • Are all family members going to be treated equally?
  • Can we mitigate family ownership issues with key management?
  • When does this transition start and how fast does it need to go?
  • How do you address uninvolved family members?
  • Is the inheritance “equalized” or does it compel involved family members to convert some assets into revenue?

Management transition

Essential personnel may not see their future with the company and begin looking for other opportunities. Policies and incentives can ensure key members of the management team better understand their role and are ready to assume ownership.

  • Have terms been addressed and negotiated long before the transition?
  • Do key personnel have contractual obligations to the company?
  • How will management be persuaded to stay with the firm as the triggering event approaches?
  • Will seller financing be available?

Third-party transition

Many owners face the prospects that a third-party sale is the most likely transition for their business as family and/or management may not be in a position to successfully assume ownership as a result of cost or skill sets.

  • Do you have an idea who a buyer may be? Competitor or acquaintance?
  • Do you anticipate a search will need to involve an investment banker or broker?
  • How do you anticipate integrating key management into this process?

Combination of family, management and third-party ownership

Another possibility is a combination of ownership. Recapitalization, a process of restructuring a company’s debt and equity mixture to increase stability, has become popular as private equity firms invest in closely held businesses and oversee the current management team.

Your business deserves a thought-out readiness and transition plan and needs to prepare for unexpected events.

Whether a business will be passed along to family or sold, a plan needs to address what comes next. The reality is that only one-third of privately held companies survive a change in ownership.

Your company’s transition plan should be shared with key personnel and the board of directors and updated, as needed. It should clearly state who will be in charge and who has the legal authority to take control if something unexpected happens to the owner.

A CPA or financial professional can help to establish a readiness plan for a successful transition, including its effect on family members today and for generations to come, that will ensure your company can survive … and thrive … far into the future.

Thomas J. Taricani, CPA/ABV, CVA, CEPA, is a principal at Boyer & Ritter LLC, with more than 27 years of experience providing audit, accounting, tax and consulting services. His specializations include formulation and implementation of succession and estate plans, and preparation of business valuations of closely held businesses for use in succession, estate planning and various litigation engagements. Contact Tom at 814-234-6919 or


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