PATH TO SUCCESSION
If you aren’t familiar with the hit HBO series, Succession, you’re truly missing out. A show which first premiered in 2018 has quickly become one of HBO’s most-watched series, winning an astonishing 13 Emmys, including Outstanding Drama Series. Following a family’s power struggle and familial strain as the impending sell of their father’s company approaches, this eye-opening series sheds a harsh light on the negative effects a family business without a succession plan can have. All too familiar with real-life succession realities, Justin Law, MBA, a Wealth Management Advisor in the Bay area, has been helping local business owners down the clear path to succession.
By Caroline Edmondson Photos Stevye Photography
There’s a hard-hitting statistic floating around from The Family Business Consulting Group and more concerning the overall success of family-owned businesses in the United States: only 30% of family businesses make it to the second generation while only an astounding 13% make it to the third generation. And, considering the wealth of family-owned businesses that operate around the Bay area, this can seem quite concerning for their overall survival, especially in a post-pandemic society. More interesting, one of the largest culprits to a failed business succession is the lack of a plan put in place well before the decision to either sell or close arises leaving a business scrambling for a fast, and often rushed, solution.
An expert in his field, Justin Law’s most impactful role as a financial advisor is being aware of the things that his clients don’t see coming and guiding them to the path that will succeed regardless of any “stress factors” that life inevitably presents. Offering both macroeconomic solutions to clients in both the personal planning space as well as the “closely held business owner” planning space. “For my business planning clients, I help with such things as providing turnkey, electronic valuations of entities; designing Business Continuity Instructions; top-line employee retention planning; coordination of business finances with personal finances; and ultimately guidance through exit-planning strategies,” shares Justin. One of Justin’s most prominent exit-planning is “succession planning,” which consists of strategically transitioning some portion of ownership in a closely held business to the “next generation,” which could be someone in the family (such as a child) or it could be a valued employee (such as a top-line executive or manager). But oftentimes, this event entails details that make the navigation of this transition very complicated.
“Most small business owners stay so busy running the day-to-day of their businesses, they rarely take the time to step back and ask the difficult planning questions that a “business planner” would bring to the forefront,” warns Justin. “ For example, maybe there are one or some children who are actively involved in the business…and there are other children who are not actively involved. This creates what is referred to as an ‘estate equalization’ issue. If there is not an adequately written ‘Buy/Sell Agreement’ in place, and if said Agreement is not properly funded upon triggering events such as death, disability, and divorce a current partner very well could find themselves negotiating with their business partner’s spouse or another family member.”
HBO.com
And just like in Succession, failing to address this type of imperative planning, not only can cause a business to be destroyed, but also families themselves can be divided, In other words, NBAC’s (non-business active children) can develop unrepairable grudges and hostilities against BAC’s (business active children).
So, you might be asking yourself: “When is the best time to plan my exit?” Surprisingly, Justin says the ideal time to plan how you will leave your business is very soon after the business is started! “Most owners have a misconception that they don’t have to worry about these events until they are ready to actually leave their business,” shares Justin. “This could not be further from the truth! By waiting until they are ready to transition out of their business to discuss this event, they are limiting the strategies available to them to prepare for their succession/exit.”
One such failed succession plan involved a father who planned for and funded the transition of the ownership of his business going to his son. “The father unfortunately failed to think about the fact that a large amount of the business debt had a personal guarantee of the exiting father,” Justin recalls. “When the ownership transitioned to the son, the banks then called in the loans with the father’s guarantee on them…since the son’s personal balance sheet did not suffice the guarantees. The lesson being that transitions of ownership stakes in small businesses are not as cut and dry as they may seem on the surface!”
So where does one even start formulating an exit plan? Justin informs us you have to start with the answers to three very important questions: To whom do you want to sell? When do you want to sell? For how much do you want to sell? Then, you can gather the supporting documents and thoughtfully devise a plan with a supportive financial advisor such as Justin. And though tensions and stress amongst families can sometimes be high during this transition, Justin works tirelessly to alleviate such stress. “First and foremost, I congratulate prospective clients in this type of situation. In my opinion, they have achieved the ‘True American Dream’—starting and sustaining a closely held small business. They should be commended for getting to the point of transitioning their life’s work to the next generation,” Justin says. “Secondly, I would encourage them that with proper planning techniques this event can be a ‘win-win’ for both the exiting party as well as the next -generation/purchasing party.”
With a seemingly endless sea of financial advisors at our fingertips, what makes Justin the man for the job? Well, one of two things. First, he’s been in many of his clients’ shoes. Justin himself worked 10 years in a 3rd generation family business that is presently non-existent. “I am a personal testimony to the pitfalls of failing to engage in these types of conversations,” admits Justin. This personal experience is what drives him to help others succeed. Secondly, Justin is a member of the BEI Network of Exit Planning Professionals, which allows him to have alliances with the best in the industry. “Exit/Succession planning is and always will be a collaborative effort amongst multiple advisors. It is imperative to engage with an advisor that works well with others, has access to strategic alliances in other fields, and will always put the client’s interests first,” says Justin.
With the proper planning, and the help of an experienced, well-connected advisor, Succession can remain a well-written fictional TV drama instead of an unfortunate reality.
Justin Law, MBA
3213 Executive Park Circle, Mobile, AL 36606
Justin.Law@yoursws.com
334.672.5665
