Three Small-Business Transfer Strategies

Throughout my career, I have had the opportunity to join Bart Boyer (Founder of Parsec Financial; acquired by Modera in 2023) 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.” 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.

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:

• 7% of U.S. Employer firms
• 64% of net new private-sector jobs
• 2% of private-sector employment
• 43% of high-tech employment

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:

• The founder of the family business can keep the business asset in the family.
• It creates a legacy (source of future income) for children and family members.
• The founder can work for the business (and generate income) until they’re ready to step away.

Negatives:

• The founder may not derive the maximum value from the business transition.
• Family businesses can cause conflict as the business is transitioned between generations.
• Identifying a family member who is willing/capable of running the family business can be difficult.

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:

• The founder often maximizes the value of the business.
• It allows the founder to walk away from the business and enjoy a traditional retirement.
• The third party often takes on all management responsibilities after the sale.

Negatives:

• The economic environment may not be ideal for a business sale/transaction.
• These deals often fall apart many times before the deal is finalized.
• The seller may not be able to replace the business income due to low interest rates (reinvestment risk).

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:

• The founder often retains a portion of ownership and cash flow throughout retirement.
• It creates a culture where employees are also owners of the company.
• Employee ownership promotes a positive client/customer experience.

Negatives:

• It can be difficult to find employees who are interested or able to be owners of a small illiquid company.
• The founder and employees often disagree about the value/price of the company.
• The founder may not derive the maximum value from the transaction.

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!

Download our whitepaper to read seven steps to succession planning.