The Succession Year – January 2013

I spoke to John Mill who is a lawyer and authority on Succession planning. He had many interesting comments on the subject.

Why has the boomer wealth transfer lasted as a news story for the last fifteen years or so? In November 2012 CIBC reported that the boomer transfer will be $3.8 trillion. Sure it’s a big number but what would it really get you? One Iraq war? The IRS budget for a year or so? Twice as much as was lost in the 2008 market crash? The stack of dollar bills would be from here to the moon; but in terms of macro economics it is just one more of many big number events. So why is the topic of business succession in the media so often?

Business succession itself is not news. Business succession has been around since the first business owner passed it on and has applied to every business owner since. The news is the volume ($3.8 trillion) and number of transactions (hundreds of thousands) that will occur and actual real people involved. This is not some war far away or the hissing of phantom derivative dollars as the monetary system deflates. The challenge is whether there will be wealth preservation or wide spread destruction of value occurring in family businesses all across the nation.

The solution begins with understanding the term ‘business succession’. What does it mean? Business succession describes: a process; a market; a transaction; and a demographic. It is difficult to be precise, so it is helpful to know what business succession isn’t.

Business succession although related, is distinct from the personal succession dealt with through a will. Business succession almost always precedes the death and in most cases the retirement of the owner.

In larger cases business succession is handled by merger and acquisition (M&A) specialists. But these larger cases only represent a tiny fraction of the number businesses in the succession market. The M&A market will only look at certain size transactions: in the first tier only companies with a value of $100 million or more will be considered; and, in the second tier only companies with a value of $5 to $100 million are considered.

Companies below $5 million in value are not considered large enough to merit the attention of an M&A firm. However many of the same practices that make first and second tier companies more valuable and sale ready apply in the small business market. Concepts such as management buyouts; strategic investors; and value enhancements have decades of development and follow fairly well defined paths.

Much of the business succession press is concerned with the barriers that prevent a business from meeting the criteria suitable for M&A. These include: business based on personal goodwill; business as a lifestyle; business as a family vehicle; and, businesses run subjectively to meet the needs of the participants rather than businesses organized in purposeful manner to maximize value and become sale ready.

The problem the media identifies is the business that is nowhere near sale ready; in fact the possibility of sale or succession has never been contemplated. For these cases there seems to be consensus that a five year process is necessary to get a business sale ready; however, there is no consensus on what should be done in the five year period.

Most competent lawyers and accountants view their practice in terms of a series discreet transactions. Professional billing reports transactions: instructions given; steps taken; and results achieved. Professional billing does not accommodate non-transactional process development over a five year time horizon. This type of ‘talk or planning’ work is often viewed as a loss leader – something less worthy of billing than a transaction.

Another difficulty is the enormity of the undertaking. It is impossible to accomplish all the transactions that need to be undertaken to become ‘sale ready’ in one engagement. Also given the number of skill sets: corporate, estate, tax, valuation, accounting and M&A is impossible that anyone small firm can handle the entire engagement. There is clearly a need for a process that brings all of these disciplines together.

The Succession Year recognizes the two major transitional phases that must be undertaken. Phase one recognizes that a small business is the best generator of wealth but that that wealth must be captured and retained to be realized. In the first phase planning takes place over several months to organize the business into a properly diversified, creditor proof, tax efficient wealth container. This is a very valuable exercise.

In Phase two the focus changes – from converting business cash flow into long term wealth – to getting the business sale ready. In Phase two the focus is the valuation and transfer of the business. Here we dig deeply into to how a valuation is constructed, how it applies to the business, and how we can proactively create value. Then we examine the methods and process of business transfer: including the tax, legal, accounting, valuation and personal issues that a business owner should be aware of upfront so that the five years of succession planning can be guided and focused.

Mark Borkowski, president of Mercantile Mergers & Acquisitions Corporation. He can be contacted at

John Mill is a Windsor lawyer who publishes the Succession [Tax Counsel] blog. His contact information is: email and phone (519) 973-1223.