Why a Business Succession Plan is Important

The television show “Succession” received a lot of buzz for its depiction of a storied clan squabbling over control of the family business. While succession planning in real life is decidedly less glamorous than the Hollywood version, it remains an extremely important process for South Florida business owners and their families. Whenever a business changes hands —whether it be from one generation to the next or an ownership transfer to another party — there are important considerations to keep in mind, both at the enterprise-level and from an estate planning perspective. A smooth, carefully planned succession is critical to the long-term health of the business as well as the financial well-being of the owners and their families.

Preparedness shortfall

Most of us have seen the statistics about a lack of retirement planning among Americans. Unfortunately, business succession is another area where many owners find themselves approaching the end of their career without any direction on who will take over their business. According to a 2021 PwC survey, only about one-third of family businesses (34%) had a formal succession plan in place. These statistics are especially concerning given that the majority of American businesses are owned by baby boomers whose retirement horizons have them exiting the business within the next 10 years.

From South Beach to outlying Dade and Broward counties, these trends mirror the demographics of our own graying business community. Florida, in fact, is especially vulnerable given that older residents outnumber younger generations nearly 2 to 1, a number that has continued to increase in recent years as more businesses relocate to the state for its relative tax advantages.

Prepping for a sale

The most obvious consideration in succession planning may be the fate of the business itself. In addition to the current ownership structure and overall financial condition of the business, there are a number of other factors that need to be considered when developing a succession plan. Probably one of the most critical — and least understood — elements of a succession strategy is determining the fair market value and salability of the business. Representing a complex web of real and financial assets, businesses are illiquid vehicles and cannot be converted into cash overnight. On the contrary, only about 20-30% of businesses put up for sale each year ever find a buyer, according to research from the Exit Planning Institute.

A high-quality commercial banking and private wealth management team with experience in business valuation and exit strategies is one of the best ways business owners can increase their odds of success. In addition to providing guidance on the business value, market conditions, and financing options, a banking team can advise owners on how to make strategic adjustments — like paying off debt, reducing costs or improving cash flow — to improve the prospect of a successful sale.

Keeping it in the family?

Many family businesses continue to be passed down from generation to generation. In and beyond Florida, however, there are signs that this practice is becoming less common as younger, more mobile generations opt for alternative educational and career options that take them further from home. Other evidence suggests it is the older generations who would rather break the chain of succession than entrust their lifelong enterprise to offspring who may be unwilling or unprepared to assume the responsibilities of business ownership. In such cases, alternatives exist, such as selling the business to employees via an employee stock ownership program (ESOP) or donating to a charity or philanthropic organization.

Whatever the case may be, intergenerational transfer carries its own set of unique considerations and should be executed with the assistance of a multi-disciplinary financial team.

Wealth considerations

Despite being one of the most critical liquidity events in a person’s lifetime, it is surprising how many otherwise-savvy business owners fail to consider the impact a succession will have on their personal wealth. Exiting a business through sale or inheritance has enormous estate implications and can make a major difference in a person’s quality of life during their retirement years. The proceeds from a business sale often represent a sudden windfall and are subject to ever-changing rules governing their taxation, transfer, and investment. For example, our current Florida estate tax exemption of $12.92 million, $25.84 million per married couple, is set to sunset at the end of 2025, leaving uncertainties around how much wealth may be transferred before it is subject to taxation.

A wealth manager well-versed in business succession can assist with other issues like retirement income generation, lifestyle maintenance and management of trust assets. These professionals can also bring in other experts as needed, such as estate planners and tax attorneys.

Hollywood depictions aside, business succession is a complex, and often daunting, process, and many business owners are finding themselves behind the curve when it comes to planning for both their business and personal assets. What many do not realize is that their commercial banking team is a good place to start when it comes to preparing their own empire for a new owner.

For more information, contact your Synovus advisor.

Michael Walker is executive director of Middle Market Banking at Synovus in Fort Lauderdale. Lillian Peters, CFP®CDFA®CTFA AIF®, is SVP and private wealth advisor at Synovus in Miami.