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Preparing to Transition Your Charlotte-based Business

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After building and running a business for decades, owners often face challenges when it comes time to sell or pass on their company to a new generation. Although many of these challenges relate to valuations and taxes, some of the most important—and frequently overlooked—can’t be measured in dollars and cents.

Indeed, those deeper issues factor into the first question Frank Goins, a Charlotte-based wealth advisor with SunTrust Private Wealth Management, asks owners considering a sale. “Let’s say you’ve found the right buyers and you handed them the keys today in exchange for a check. What do you plan to do tomorrow? What outlet do you anticipate having for your drive, creativity, wisdom, knowledge and experience?” Without a confident answer to that question, a business owner is not yet ready to sell.

How to get started

Business owners should ask themselves if they are willing to be flexible about the results of the transition planning process. Jason Sykes, client advisor with SunTrust Private Wealth Management, also in Charlotte, finds many business owners weigh tax and financial implications less heavily in their decisions than family dynamics or other factors. Business owners may have an outcome in mind of exactly what they want to happen with the firm—money aside—and achieving that outcome drives the planning process. A willingness to explore other alternatives, however, can sometimes yield superior results.

Some owners, whether they’re planning to pass the business on to a family member or sell it, underestimate the importance of getting a realistic valuation of their firm and “staging” the company, the way a realtor would stage a home before putting it on the market. Ensuring the business is operating as efficiently and effectively as possible can enhance the valuation, as can ensuring the business runs optimally without the owner. If the owner is no longer integral to the firm’s success, a potential buyer is willing to pay more for the business.

When it’s all in the family

Time is an ally when passing family businesses on to the next generation, Goins says. Early planning gives owners time to sort through some of the emotional issues that will inevitably arise, and it can offer a way to mitigate uncertainty related to taxes. Furthermore, taking time allows family members who aren’t certain whether they want to continue the business the chance to experience the realities of ownership in small doses.  

Parents should have open, honest conversations with their children early in the planning process and should take the children’s input seriously. “It may be that Mom and Dad are saying, ‘We want to pass this down to you,’ and the kids finally have enough courage to say, ‘This isn’t my dream. It’s not what I want to do. I think we probably ought to sell rather than you passing it down to me,’” Sykes says.

As difficult as that prospect may be for some parents, it may ultimately prove the best outcome for both the family and the business. “I had a knowledgeable matriarch tell me that you can always leave someone your money, but you can’t leave them your passion,” Goins says. Without passion as a motivator, both the new owner and the business are likely to underperform. 

Plus, planning ahead creates opportunities to address problems that may not otherwise surface until after the baton passes to the next generation. Parents often struggle to give their children a level of responsibility within the business that allows for failure. “But, when that owner was biting and scratching and clawing, trying to build that business, they probably failed at a number of things along the way—and learned from them,” said Sykes. “Sometimes, those are the only things you can learn from, and to have a member of the next generation come along, they’ve got to have fallen down and skinned their knees along the way to be an effective leader.”

Dig into the numbers

More time for planning also allows a thorough exploration of both short- and long-term financial implications. Owners sometimes focus too much on the gross number rather than the net, but different structures or transaction types can translate the same gross number into vastly different net numbers.

Liability is also important to consider. “We always want owners to consider selling the shares of stock in the company versus the assets,” Goins says. “That’s better for income taxes, but it also helps in the long term where, if they sell the stock, they could limit future litigation risk.”

The two biggest financial factors in transition planning are estate and gift taxes, as well as income tax, says Goins, and changes in these taxes are likely to affect how business owners reach their objectives. The shift in power in Washington could change the tax code, particularly the estate tax. As a result, it may make sense for owners to consider waiting to transition their firms. Whether the estate tax will change this year or next remains to be determined, Sykes says.

Owners in Charlotte can also keep an eye on the state income tax, which may change. However, with a Democratic governor and a Republican legislature, the status quo could prove more likely, according to Sykes and Goins. Still, owners should not necessarily wait to plan. “Some of the [planning] objectives would not change based on a tax change,” Goins explains. “But the method would most likely change.”

Preparing for a Post-Ownership Future

Once a business owner hands over the keys to a new owner and begins devoting energy to new endeavors, financial questions still remain. That’s why financial planning is an essential part of preparing for a transition. Relinquishing control over how they will generate income after the sale may create uncertainty for owners. They often have most, if not all, of their wealth invested in their own companies. As leaders of the firm, “they feel like they’re in control of that, whether they really are or not,” says Sykes. When it comes time to invest in other financial instruments, they feel less certain. “That’s a big psychological jump,” Sykes says. “They may actually be taking less risk by diversifying their wealth, but psychologically, that can be a real barrier.”

Overcoming these challenges requires a team effort. Goins and Sykes recommend looking for advisors with expertise in tax, law and finance, and within finance, expertise in both mergers and acquisition and personal finance.

When seeking advice, Sykes suggests looking for yet another quality: candor. When owners work with advisors who are willing to be straightforward, even if that means the advisor says things the owner doesn’t necessarily want to hear, the ultimate outcome is likely to be better than if the advisor is deferential.

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Learn more about key business insights in the Charlotte region.

Frank Goins and Jason Sykes are Registered Representatives, SunTrust Investment Services, Inc., Investment Adviser Representatives, SunTrust Advisory Services, Inc.

Disclaimers

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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