Passing the Torch without Getting Burned

An interview with RBF managing partner Bill Rucci about the importance of business succession planning.

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When you talk about “passing the torch” in the business world, you are referring to the concept of business succession or business transition. What is business succession exactly?

Simply put, business succession is the process of planning what happens to your business once you’re no longer there to run it. Business owners put so much of themselves into building a business and making it a success. When it comes time for them to retire, putting their company into someone else’s hands — even if that someone else is their own son or daughter — can be very difficult.  Then you add in family dynamics, as well as legal, financial, and tax considerations, and many business owners end up trying to avoid the subject entirely. But that’s a big mistake.

 Is the topic business succession getting a lot of attention in the business community right now?

It’s already become a big issue, and it’s certainly going to get bigger. It turns out that privately-owned businesses are entering a period of massive leadership transition in the next decade.  It’s estimated that 8,000 people are turning 65 each day. And surveys show that seven in ten business owners in the U.S. expect to exit their company in the next 10 years.  So it’s only a matter of time before owners are forced to confront important questions about the survival and continuation of their businesses. 

What is the danger of not confronting these issues?

The stakes couldn’t be more important.  Without proper planning, owners may face adverse financial and tax consequences for themselves and their families.  But by starting early, a sound business succession plan can lay the foundation for a smooth and personally fulfilling transition.

You can almost hear the pushback from business owners now. “Retire?  I might as well be dead.” “Nobody can run my business as well as I can.” “My children will ruin everything I’ve built.”

Exactly! And these are all expressions of the very understandable fears that can end up hindering the planning process. As I’ve said, without proper planning, a business owner can risk adverse financial or tax consequences, or even endanger the entire future of the business. But a well-defined succession plan can go a long, long way to ensuring a successful transition and a bright future for everyone.

So, what are some of the steps that a business owner should take in order to put an effective business succession plan in place?

When building a plan, it is best to 1) start early, 2) create a support team, 3) identify and communicate your goals and objectives, and 4) design, develop and monitor the succession plan.

Talk about the importance of starting early.

The timeline for implementing a successful plan is about five years.  Add to this the time needed to explore alternatives and the horizon becomes even longer. This may make retirement feel like a distant concern.   Yet an unexpected illness, death, or divorce can force you to confront reality much earlier. 

It is also important to allow enough time for stakeholders and family members to adjust to and accept your plans.  Without their support, you risk alienating family members or losing key employees.  You also want to set aside enough time to choose, train and develop your successor before you step down.

What do you mean when you say “create a support team?”

Even the simplest succession plan involves financial, legal, tax, and estate planning.  So it’s a good idea to include an accountant, a lawyer and perhaps other professionals on your planning team.  Including family members and key employees will also help ensure their acceptance of your plan, and prevent conflict.  Your accountant is probably the best person to run the planning team, since tax planning and financial analyses are both important parts of the entire succession planning process, from start to finish.

If we’re talking about a family-run business, are there any specific pitfalls that the owner needs to be aware of?

Well, choosing a successor can be stressful for any owner, but it can be especially so if you have several children.  Most parents want to treat their children equally. So where the business may be only one asset of the family’s wealth, the owner may decide to allot other assets to children who are not active in the business.  If the owner cannot identify a successor – which happens sometimes – it may be time to decide whether to sell or wind up the business.    

The best way to manage this type of hazard, of course, is to be clear about your financial and personal goals for the business and your life. Your support team can help you articulate these goals and overcome the psychological barriers that often come with discussing personal matters.  Once key employees and family members understand your intentions, they are more likely to support your plan.

What happens next?

Once all the alternatives have been considered, put your succession plan in writing.  But at the same time, a good succession plan must be flexible. This allows the owner to respond with confidence if reality throws you a curveball.   Occasional meetings with your advisory team help to ensure that your plan remains current, and helps to keep the lines of communication open between key stakeholders.

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bill-2_ppWilliam F. (Bill) Rucci, CPA, MST, CGMA is the founder and managing partner of the business advisory and accounting firm Rucci, Bardaro & Falzone. Bill heads the firm’s Tax and Business Planning Group.  He can be reached at (781) 321-6065 or billr@rbfpc.comFor a free copy of “The Top 10 Steps of Succession Planning for Privately Held Business,” contact Bill Rucci via phone or email.


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