← The Unshakeables
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- [00:03]
Adam Frank
Ruby.
- [00:08]
Ben Walter
Hi, everyone, it's Ben. Over the last couple of seasons here on the Unshakeables, we've had the chance to hear from some terrific guests who've shared their journeys to becoming small business owners, successful ones at that. And as I listen to their stories of grit and determination, I can't help but wonder how many are thinking ahead to what happens when it's time to step away. Legacy planning is something most people don't consider until it's too late, and by then, it can be a tough situation to navigate. That's why we're dedicating a bonus segment to this topic, because it's just that important. And to dive into it, I'm joined by my colleague Adam Frank, who's head of wealth planning and advice here at JPMorgan Chase. Adam is an expert in wealth planning and thinks a lot about things like succession and what to do when you're ready to move your business on, and then what to do with the funds, if you're successful, raising funds from that sale. So we thought we'd have him on just to talk about that. So, Adam, welcome to the show.
- [01:04]
Adam Frank
Thanks, Ben. Thanks for having me.
- [01:05]
Ben Walter
It's really good to have you here. So let me give you a couple of statistics that I think are relevant to this. If you survey small business owners across the country, there is no secret that there's a bit of a silver tsunami going on. 75% of all business owners would like to exit their business within the next decade. Now, that might be that they just want to sell and monetize and do something else. It might be that they're getting toward retirement age. It doesn't matter why. There was a recent survey of 300 business owners, and it found that most business owners report having a plan in mind, but a plan is very loose definition of what they have. Only half have a specific and detailed plan. So this is a huge pressing issue for the economy, for American society, and for entrepreneurs in particular. And people do a lot of planning in their personal lives, right? They plan to retire, they hire financial advisors. They have a wealth plan, they have a retirement plan. Why is it harder with small businesses? What is it about making a plan for succession in your business that makes it harder?
- [02:03]
Adam Frank
I think people think of their business in many ways as one of their children, and it's something that they devote a lot of time to, but they don't often want to think about what happens when I step back, because it's like stepping back from one of your kids. Right. It's very Difficult, I think, for business owners who have developed a business and grown it for so many years to really think about what that looks like. And people don't want to talk about it in the same way that people put off creating a will. I think a lot of it is avoidance and then a lot of it is business owners often don't have a ton of time to think about their personal finances because they're so busy focused on the business, whether it's in the growth phase or nurturing it to grow more. They're constantly thinking about how can I optimize the business? And they're not thinking about the business as an asset on their personal balance sheet and what that means for their retirement, if they have one, and so on.
- [02:59]
Ben Walter
And often it's their biggest asset, right? It is the single biggest assets on their balance sheet. Probably bigger than their house. In many cases.
- [03:04]
Adam Frank
In many cases it is, yeah.
- [03:06]
Ben Walter
So let's talk about the options. I mean, if a business owner wants to start thinking about succession, what are the options available? Right? Because some people say I want to pass it to my kids, but what if my kids don't want it? Some people say, you know, I'd love to sell it, but what if no one's there to buy it? Is the business even saleable?
- [03:22]
Adam Frank
And it isn't always, especially businesses like my dad was a CPA and he was a one man shop and his succession plan was not to die. That was his succession plan. He wasn't going to die. Everything was going to be great and he would continue to work forever. And eventually my brother became an accountant and started helping my father out and that became a de facto succession plan. But it was never a plan, it just, it was a succession happened. He had three sons. He was lucky that one of them wanted to become an accountant and do that. A lot of businesses that rely on the reputation of the owner, it's going to be much more difficult to sell them or even to have a family member succeed because not only does the family member have to want to run the business, be an accountant, own a driver, whatever it is, which many times they don't, they have to be able to like, they have to be capable and not everybody is capable. Even if succession in the sense of passing an existing business on to somebody is successful, the business withers and dies because the person you've passed it to is. The only qualification is that they have your genes and that's it. You didn't really think about are they interested, are they capable and what, if anything can I do, to help them be more successful, other than they're my kid and I love them.
- [04:41]
Ben Walter
Right. I mean, so essentially the three choices are you shut it down, you pass it on in the family, or you sell it.
- [04:47]
Adam Frank
Or you sell it. And selling. There are a number of options with sales. If it's a big enough business and you have employees who've been with you a long time and who are good at what they do, you could potentially sell it to your employees either through an employee stock ownership plan, which is like a qualified retirement plan, it's another way of retaining good employees, or selling it to a competitor, what they call a strategic buyer, somebody who is looking as a strategy to grow to acquire competitors or complementary businesses in their industry. Or just sell it to a financial sponsor, somebody who's interested in buying a business to, to grow it to make a profit for themselves or their investors.
- [05:25]
Ben Walter
Or you could sell to another entrepreneur who wants to own a business and doesn't want to do corporate life anymore instead of starting a business, wants to buy a business.
- [05:32]
Adam Frank
Exactly. And that's a great way in for people on the buy side who want to be entrepreneurs but don't have that entrepreneurial idea.
- [05:40]
Ben Walter
So let's assume those are the two big options, right? You either pass it on to family or you sell it in one of those forms. Let's talk about each of those. So first, passing along to family, which can mean giving it to them, it can mean selling it to them, it can mean some combination of that. For business owners out there who really want to do that, what should they be thinking about?
- [05:58]
Adam Frank
Well, as a business owner thinking about transition, you've got to think about the things that you do for the business. Customer generation, contract negotiations, sales, you name it, operations, doesn't matter, everything, compliance. Depending on what business you're in, can the person or persons you've identified in your family who you want to pass the business on to, can they do that? Can they do all of those jobs? Because if they can't, and again, depends on how big the business is. But if you have a couple of employees, even part time, think about where your child or family member is really competent. Think about places where they might be less competent. Think about how to complement them and accommodate their strengths and opportunities, maybe with different employees, different people to bring on.
- [06:47]
Ben Walter
I always tell people, also, you're probably going to have to work together. So figure out how you're going to do that. Because the transition is not going to be one day you wave and you walk out the door. You're still going to be in a situation for at least a period of time where you have to work together and have Thanksgiving together.
- [07:02]
Adam Frank
Yes, exactly. Usually what I see when it's family members, the business owner's retirement plan is to have their child buy them out. Over time, their involvement lessens. Year over year, the child's involvement increases. But there's that payment stream which substitutes for the salary that they're no longer getting, or that is significantly lower because they're not doing as much work that lasts until they qualify for Social Security or their pension kicks in or their whatever it is, they're getting other streams of income. But it's more often a sale than a gift.
- [07:36]
Ben Walter
So I encourage everyone who's interested in that to get some expert advice because navigating that through family dynamics can be challenging.
- [07:44]
Adam Frank
It can become very messy. So it's a good idea to really think that through. And one of the things that we encourage business owners to do, and I know you do as well, is really think about putting together a good team of experts around you as your business grows. A good accountant, a cpa, a good attorney, both a business attorney and eventually a wealth transfer and estate planning attorney. Potentially an insurance person. Right. Somebody to think about how the business can be bought or be sold if something were to happen. So there are a lot of people who can surround the business owner and really help them out.
- [08:18]
Ben Walter
That last one can be really important. And we've seen a couple of businesses where, because they didn't do the proper estate planning and there wasn't any life insurance in place, they had a liquidity crunch because the business passed to three siblings, but it needed liquidity to operate. The siblings couldn't come up with the liquidity without life insurance from the parent's death. So the business was successful. But a business without enough liquidity, it doesn't matter.
- [08:40]
Adam Frank
Right. And having the liquidity that insurance provides allows for buy, sell. It allows for the people who are interested in continuing the business to buy out their siblings who aren't. It provides that cash to allow them.
- [08:52]
Ben Walter
To do that because otherwise they might not have the liquidity.
- [08:54]
Adam Frank
Exactly. Because their biggest asset is the business as well.
- [08:56]
Ben Walter
That's right. So let's talk a little bit about selling a business. I think we should take it in a couple stages. One is, how do you make a business saleable? And we talked a little bit about that, but I think we should sort of put a few fine points on it and then talk about, okay, once you think you have a saleable business, how far in advance. Did you start thinking about it when you're ready to do it, how do you do it? I mean, we know when you get really big, you hire an investment banker and you go do that. But that's not how most businesses in America are sold.
- [09:21]
Adam Frank
No. And the people business owners most frequently talk to are their banker or if they have a personal financial advisor, their financial advisor. But those are the two financial professionals who are usually involved with the business from early stages, ongoing. And so those are usually good people to bring in. In the first step in terms of making the business saleable and when to think about it. I want to address the second point first because I think it's never too early to think about. The five Ds are the things that usually come into play when somebody doesn't have a plan. Death, disability, divorce, disagreement, distress, financial distress from markets and other things. And having the plan, you need to do it in advance of any of those things in order for it to be effective. So the 50% of business owners who have a specific and detailed plan, I just wonder how many of them actually have, like, a written plan that could be executed if something were to happen to them?
- [10:17]
Ben Walter
I mean, it's just a survey. So it just means when someone asks, do you have a plan? It means, yeah, but it might be like, yes, in my head, I'm going to give it to my oldest kid or whatever.
- [10:24]
Adam Frank
Exactly. We've had experiences like that where we had clients who were the heirs of a business owner who said, don't worry, I've got it taken care of. It's all set. He died unexpectedly. It was not all set. He did not have a plan. And it went to court and it became very messy among the family. So having the plan early on, getting those key team members around you, is critical.
- [10:47]
Ben Walter
Can I just interject one thing there? Because I know there are a lot of people listening saying, yeah, but that was some big business for some rich person. And that doesn't apply to me. It doesn't matter how big you are, because if it's your biggest asset, that biggest asset could be worth $200,000 or $200,000,000. It's still your biggest asset. And. And that means it's your kid's biggest inheritance. And it can get messy.
- [11:07]
Adam Frank
Absolutely. And that really applies to everybody. It applies to the person who owns the dry cleaner or the plumbing supply shop or the auto repair, like, whatever it is. If that's your asset, that's your asset in terms of making it saleable. If you're going to sell it to your employees, you need to make sure that they can fill all the roles. And if they can't, you need to make sure that you bring in management or bring in other people to support them. In selling it to a third party, the things that are important are making sure that it's an attractive asset to the third party. So if you're not paying yourself a salary, but you're taking a dividend from the company for tax reasons or whatever, the earnings that you report are going to be artificially inflated, for example. So you've got to do what's called normalized earnings. Audited financial statements. Right. Getting a CPA firm to come and audit your financial statements and say, yeah, these are. Right. These are according to generally accepted accounting principles. Here's the earnings, here's the equity, here's the liabilities and so forth. Making sure that your personal assets aren't sort of owned by the business.
- [12:07]
Ben Walter
Right.
- [12:08]
Adam Frank
There was.
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Ben Walter
We have a lot of that.
- [12:09]
Adam Frank
Yes. Well, and it's common when I'm talking to people who are thinking about starting a business, or to your point earlier, buying a business from an existing entrepreneur, it's very common for them to say, well, can I deduct this? Can I deduct that? Yeah. If your spouse is working in the business, if your kids are working in the business, you can take tax deductions. People will run personal expenses through the business. Postage, their car. Right. Because you need a car for the business, and it just happens that you need a car for yourself, and it happens to be the same car. In one case, there was a business down in Florida that was getting ready to be sold. And we had to tell one of the co owners that the McLaren needed to not be owned by the business.
- [12:47]
Ben Walter
He needed to buy it, he needed.
- [12:48]
Adam Frank
To buy it from the business, he needed to insure it. And it was the expenses of owning that on his personal balance sheet, as opposed to the company's balance sheet, were much higher. He wasn't happy with that news. But eventually the sale price more than made up for it. But it's those kinds of things. It's really separating the business from yourself personally and only having things that legit belong to the business.
- [13:10]
Ben Walter
Okay. And then when you get ready to sell and you talk to your banker, you talk to your cpa, should you be thinking about doing it yourself? Should you be thinking about using a broker? How should people think about it?
- [13:20]
Adam Frank
It's such a hard question. I think if you've put a good team together, your bankers, your attorneys, your Insurance flags, like your team can give you that guidance. In general, I think people get higher prices if they employ professionals. People who do this all the time, whether it's a business broker or an investment banker, or it's like when you sell your house. A merchant banker. Exactly. If you do it, you could do it yourself, but if you do it through a realtor, generally they know how to stage it and they have the people to come and take beautiful photographs and how to price it, all of those things. But the more professional advice you get, I think, generally, the better the outcome.
- [13:56]
Ben Walter
Yeah, I mean, the final piece of advice I would give people who are selling is that let's go back to where we started. This is very personal and this can be emotional for business owners. So if and when you sell, are you going to stay involved? Very often a buyer wants you to stay involved for a period of time. How are you going to feel being involved but not making decisions? Because that might happen. In fact, it's probably going to happen. How do you feel about not being involved and in fact, seeing someone run it away? You wouldn't. You have to make peace with all those things before you're really ready to sell the business.
- [14:28]
Adam Frank
And even, I don't want to say, even more important, but at least as importantly, you need to have something that you're going to go to or you're going to be unhappy. And a lot of business owners who sell without having planned it ahead of time because they got an offer that was too good to refuse or something else regret selling because the business was all they knew. It's a very emotional thing for a business owner because again, it's like your kid rejecting you. You worked hard on them for 40 years and now they're saying, yeah, thanks, we don't really need you anymore. You're done here. Like, let the new blood finish this up.
- [15:03]
Ben Walter
So I'll leave our audience with a somewhat sobering statistic, which is only 30% of businesses successfully pass on to the next generation, and only 20% actually sell. And those are the ones who have already survived long enough to either pass on or sell. And the statistics show very clearly that the ones who make an explicit plan have better outcomes than the ones who don't.
- [15:25]
Adam Frank
And it takes a while to plan because it's thinking about all these things you don't want to think about. You can't expect that over a weekend or on a family vacation. You'll just get it all out on paper. You've really got to think about it. If it's going to family member. You got to engage them and talk to them. And so the sooner you start, the better off you'll be. And for the people who didn't have a plan, I think the survey said 63% without a plan thought it was too early and then it wasn't. And then they sold without a plan. And presumably if they sold it or transitioned it, it was successful in that sense. But they probably didn't maximize the value of what they had built and spent so many years on for either themselves or their family. Because this, as you say, it's people's biggest asset. It's the legacy they're leaving to their kids and their grandkids. And you want that legacy to be as much as you can.
- [16:14]
Ben Walter
Adam Frank, thank you for joining us on the Unshakeables. I think that was an important conversation for business owners all over the country. I hope everyone took something away from it. And if you own a business, please go out and make a plan.
- [16:25]
Adam Frank
Ben, thanks for having me.
- [16:29]
Ben Walter
We do encourage all of our listeners and all of our clients, frankly, to have their set of advisors and a banker's only part of that. So I encourage me to go to chase.com succession where you can find further information on succession planning for small business. Thanks so much for listening to this episode of the Unshakeables. If you liked this episode, please rate and review it. I'm Ben Walter, and this is the Unshakeables from Chase for Business and Ruby Studio from iHeartMedia. We'll see you back here soon.