Family Businesses: Planning for Succession

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succession planningTalking about succession planning for family owned businesses…

Did you know that 7 out of 10 Baby Boomers plan to work past the age of 65?  

While that’s not really too surprising, given that generation’s legendary work ethic, this can cause a problem in family businesses, particularly around succession plans. Indeed, when some owners are asked when they plan to retire, the answer is often a laugh, followed by, “Never.”

Understandably, sometimes people simply aren’t ready to retire. They enjoy the work and have much of their identity and lives tied to their companies.

Yet, their children are also looking for some kind of certainty. They need to understand the succession plan so they can begin to plan their futures as well.

The Conflict

The older generation tends to have experience which can’t be taught. The younger generation has enthusiasm and a willingness to take risks that can’t be shared (there’s a shorter timeline for the older generation to recover from losses). Both sides have to step out of their comfort zones.

The younger generation has to understand the wariness and desire to move more slowly on the part of the older generation. Gentle prodding, encouragement, and an overall positive attitude can go a long way, even when there are personality and management differences.  

The older generation has to learn some new tricks too. They need to take time to rediscover their “whys” and ensure that their identities are not entirely tied up with their businesses. If not, then there’s no hope for a peaceful exit.  

This doesn’t mean that they need to develop a forced love of travel or new hobbies overnight. But one thing is for sure…some kind of plan of transition has to be put in place. The new blocks of time they receive as their responsibilities are (slowly) lightened can be used to reflect on the larger questions of life. The “what’s next” questions are ultimately far more important than the day-to-day operations of a business.

Most family businesses will tell you that family comes before business. That’s why these discussions always need to be had with a lot of empathy and love, on both sides. And why they can’t be put off indefinitely.

If you haven’t started to have succession planning discussions, there’s no time like the present.

Using Your Retirement Account to Acquire a Business

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retirementTalking about using your retirement account to acquire a business…

We’ve previously discussed getting an SBA loan (and many of our acquisitions use the SBA) when starting or buying a business.

If that’s not an option open to you, or if you need even more financing, or if you need more cash for a down payment, you might consider using your retirement account to help you.

Below are general guidelines. Keep in mind that tax rules are complicated and each person needs to check with their tax professional.

Retirement Account Options

The IRA route

You can take a distribution from your account. The consequences of this vary based on whether you have a Roth or Traditional IRA. Your age when you take this distribution is also a factor. The IRS wants its cut, so there may be taxes to pay as well as early distribution penalties.

The 401k route

Slightly more complicated than a simple distribution from your account is a loan from your 401k. In the United States you can borrow up to 50% of your account value or $50,000, whatever is less. There is interest on the loan. It has to be paid back over a five year period. This won’t buy you much and since it’s a debt to be repaid, it may not work when getting that SBA loan.

The ROBS route

The most complicated but most common way to use retirement funds to fund a new business is a government program called “ROBS” (Rollovers as Business Startups). This allows someone to roll over retirement funds in order to purchase a business without the taxes and penalties of a distribution.

Here are the basic steps:

  • Roll over a pre-existing IRA or 401k into a 401k that is sponsored by a C corporation
  • Invest the funds into that C corporation by buying all its shares
  • Operate the new business

Here’s the rub…Despite the fact that the IRS has stated specifically in writing that ROBS is a legal program, there’s been a history of auditing businesses created via ROBS as the IRS fears abuse (at least, that’s what they tell us).

Whether you’re considering ROBS, or taking a loan from your 401k, or taking distributions from your IRA, this isn’t something you should do on your own. This is especially true when it comes to the ROBS program.

There are advisors who are specifically trained to properly use these instruments. They’ve done it over and over with clients. We know these advisors and would be happy to share their names with you. Simply send your Apex advisor an email and we’ll connect you.

Book Club #9: The Personal MBA by Josh Kaufman

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personal mbaBecause college degrees carry (still) such an outsized weight of social proof, some business owners have been known to acquire an MBA after they’ve built, scaled, and sold a company.  

Josh Kaufman persuasively argues in his 400+ page book The Personal MBA that you don’t need to do that.

Reading his book can distill most of the curriculum covered in most business schools. It’s been an international bestseller for years and is an excellent book to read for any business owner, whether they’re a rookie or a seasoned veteran.

Business Schools are behind

“…if business schools convey professionally useful knowledge – then a measure of how much one has learned or mastered the material, such as grades in course work, should be at least somewhat predictive of various outcomes that index success in business” and “...you realize that the concepts, principles, and techniques most business schools teach were designed for a very different world.”

These two quotes underline Kaufman’s thesis: If business schools were so great, their best graduates would do the best in business, but we see no clear correlation, and worse, the schools are teaching outdated information.

Define your terms

Kaufman defines a successful business as having the following 5 traits:

  • Creates or provides something of value that…
  • Other people want or need
  • At a price they’re willing to pay, in a way that…
  • Satisfies the purchaser’s needs and expectations and…
  • Provides the business sufficient revenue to make it worthwhile for the owners to continue operation.

Thoughts to challenge

The book is chock full of maxims and is written in a “bite size” style in which no chapter is longer than 3-4 pages. Kaufman focuses on an idea at its core, reiterates its importance, and moves on. Examples include:

“If you’re looking for a new business idea, start looking for hassles.”  
This is a much more visceral way of summing up the problem than “build a better mousetrap” in an age when most people have never seen a mousetrap, and would probably hurt themselves trying to set one.

“Advertising is the tax you pay for being unremarkable.”  
This may hurt to hear, especially if you have to do a lot of advertising for your products or services. But this follow-up elaborates:  “The product that will not sell without advertising will not sell profitably with advertising.”

“If you can’t describe what you’re doing as a process, you don’t know what you’re doing.”  
We talk about systems frequently here at Apex, because systems being in place is what we see as a commonality in the most successful business sales. You start building those systems by even being able to articulate them out loud. If you can’t do that, you’re in real trouble.

So do yourself, your customers and your business a favor and check out The Personal MBA today. It may be one of the best things you ever do for your business.