As a wealth management firm, we have long preached the benefits of owning shares of public companies as an investment vehicle to build long-term wealth. We are clearly not alone in this endeavor. There are many news agencies and television programs that spend countless hours debating if and when investors should buy and/or sell certain hot-topic companies.
Throughout my career, I have had the opportunity to join Bart Boyer at several client appreciation dinners. During these events, Bart would famously review the current economic environment and discuss how to build long-term generational wealth. Without fail, he always reminded clients that “there are only two ways to build wealth: through business ownership and ownership of real estate.”
Not only am I a CERTIFIED FINANCIAL PLANNER® professional for a firm that focuses on investing in public companies, but I also come from a long line of small-business owners. My father is the second-generation owner of a small family-owned business in Evansville, Indiana (my brother will eventually become the third-generation owner). My father-in-law recently sold his second-generation electrical distribution and manufacturing company to a private equity firm. And I am a second-generation partner and owner of Modera, formerly Parsec.
Unlike public companies, news agencies and television programs give little (if any) time to small business succession planning. This is surprising given that according to the U.S. Small Business Administration, small businesses make up a significant share of the U.S. economy:
Given the above statistics, it is not surprising that we work with many clients who have either started, inherited or purchased small businesses. Many of these business owners have become experts at running and managing their small company. However, it is always surprising to learn that few have given much thought to how they will transition (monetize) their business. This can lead to complicated retirement planning meetings since many small-business owners’ largest asset is the business itself. Below we will examine three commonly used strategies for small business succession planning.
Intrafamily business transition (inheritance):
This is the transfer technique that my father (and his father before him) have used to transfer Ziemer Funeral Homes generationally. My grandfather started the business and eventually sold it to my father who had worked in the business for his father for decades. The same transition is now taking place between my father and brother. Here are three positive and negative aspects of intrafamily business transition:
Positives:
Negatives:
Private sale to an outside third party:
This is the transfer technique that my father-in-law used to transfer (monetize) his business. He was not able to identify any family members who were either willing or capable to allow for an intrafamily transition. Thus, he worked with an investment banker to find a private equity firm that purchased his manufacturing company as part of its overall portfolio. The most common types of outside sales are usually made to an investor group (like a private equity firm) or a strategic buyer (a company in the same industry looking to expand). Here are three positive and negative aspects of outside sales to a third party:
Positives:
Negatives:
Internal sale to employees:
This is the transfer technique that was used at Parsec (now Modera). The company was founded by Bart Boyer in 1980, and he had long believed in the benefits of sharing equity with employees which made Parsec a family-and-employee-owned company. Here are three positive and negative aspects of internal sales to employees:
Positives:
Negatives:
As you can see, there are many reasons why our favorite financial channels often avoid the topic of small business succession planning. They are quite messy, and there is no perfect strategy. And like most financial planning conversations that we have with clients, we must first know our clients’ objectives and situation before finding the appropriate solution. The best advice I can give to small-business owners regarding the best transfer technique for their business is to start planning now!
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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