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Exit planning for family-owned businesses during the COVID-19 pandemic

The impact of the COVID-19 pandemic has been far-reaching, both in the U.S. and worldwide. As federal, state and local governments contemplate the best ways to lift lockdowns and distribute a vaccine, many current generation family-owned business owners are beginning to consider exit options.

I recently “Zoomed” with the co-founder of the Exit Planning Institute and the founder of Master Planning Institute, Peter G. Christman, along with Baker Tilly Partner, Brandon Zlupko, to understand the impacts of COVID-19 on family businesses and the importance of using an organized, rigorous process to guide family business owners through an ownership or leadership transition.

Peter. G. Christman is one of the leaders in the world of exit planning and has authored three books on the topic, “The Ten Trillion Dollar Opportunity,” “The Master Plan” and “Master Planning Success Stories.” During his career, Peter has sold more than 200 companies. Baker Tilly Partner and CPA, Brandon Zlupko, specializes in helping family-owned businesses enhance and protect their value, as a Certified Exit Planning Advisor (CEPA).

The objective of our conversation was to learn how the COVID-19 pandemic has impacted family business owners and discuss how they should prepare for the future. Read the Q&A derived from our conversation below.

Peter, why is exit planning such an important topic as we begin 2021?

Exit planning is an important topic given that over 7.7 million business owners will need exit planning services as the baby boomer generation approaches retirement. These business owners represent over $10 trillion in wealth. Yet, surprisingly, the majority of business owners report that they have no formal plans regarding how to retire or exit from their businesses.

During the pre-pandemic economic boom, many families delayed their decision to sell. However, after spending the last nine months in quarantine or lockdown and seeing the value of some of their businesses erode, we are seeing a new surge of baby boomers wanting to exit. Anecdotally, we are observing many baby boomers coming to the realization that life is short. They have created enough generational wealth, and they are ready exit in order to spend more time with their children and grandchildren.

Brandon, how has the pandemic influenced transition/succession plans of the senior generation?

The pandemic is causing people to think differently about their lives and has acted as the catalyst for many business owners to think about transition/succession plans. Since the pandemic, Baker Tilly has conducted many COVID-19 recovery preparedness assessments with family-owned businesses. Our assessments have revealed that almost three quarters (74%) of family business owners have seen reduced profitability and 40% have seen negative impacts on profitability. Additionally a little over half (55%) of business owners are speeding up the transfer of the business to the next generation (24%) or to a non-family buyer (31%).

Peter, are family-owned businesses prepared for these changes driven by the pandemic?

Research suggests the following:

  • 83% of business owners have no written master plan
  • 80% of all business owners have 90% of their net worth tied up in their business
  • 50% of business owners exit their businesses through the “5Ds,” which are defined as:
  1. Death
  2. Disability
  3. Divorce
  4. Distress
  5. Disagreement

Thankfully, the 5Ds are not unforeseeable. Family business owners must take the strategic steps towards mitigating the potential impacts of the 5Ds by preparing a clear, well thought-out master plan.

Peter, how do you start developing your master plan?

Before starting the planning process, family business owners must compile a team of advisors. The team should be led by a “quarterback,” who is responsible for coordinating the efforts for the entire team. The team should consist of value enhancement, financial, estate, tax, family business and legal advisors.

The quarterback should be trained in exit planning. Being a Certified Exit Planning Advisor (CEPA) is highly recommended.

Brandon, as a CEPA – can you explain how this certification helps when advising family business clients through a transition?

At Baker Tilly, we refer to the “quarterback” role as a “Value Architect™". Our mission is to help our clients enhance and protect value. The CEPA certification prepares advisors to act as “Value Architects” because the process and framework’s focus is protecting and accelerating value. While leading the exit planning process, I make sure that we have the right technical experts on the team (estate, tax, strategy, family business, etc.) and coordinate the process to meet our client’s objectives.

Peter, can you describe the master planning process?

Visualize the master planning process as a three-legged stool. The seat of the stool is the master plan. “Leg one” consists of doing everything possible to maximize a company’s value. “Leg two” involves developing a financial plan that includes estate, tax and financial points of view. “Leg three” involves creating a life plan and vision for the owner’s legacy. The life plan will focus on post-transition “third-act” activities, such as hobbies, philanthropy, new business interests, etc.

master plan concept


Brandon, many businesses have reported a decrease in value due to the pandemic – what should they do to increase value?

When looking at how to influence value (leg one), business owners should take the outside-in perspective. Owners should be thinking about the following questions from the buyer’s perspective: “What is important to me?” “What factors would lead me to pay more or less for the company?” Often, this comes down to the intangibles and what a CEPA would refer to as the “4Cs,” which are defined as:

  • Human capital
  • Customer capital
  • Social capital
  • Structural capital

80% of a business’s value is tied to these intangibles. True value acceleration occurs when owners manage and focus on the 4Cs.

Market value is impacted by a variety of factors – some, like EBITDA and proprietary products are controllable and some like unforeseen pandemics are not. For more information on these factors, our article “Growing your private company’s value in a time of uncertainty” reviews them in more detail.

Peter, is a valuation required with the master planning process?

Yes, we begin leg one with a market valuation that will tell us what a willing buyer will pay to a willing seller. At this point, we can determine the “value gap” or the difference between what the market says the company is worth versus what the business owner wants or thinks their business is worth. After the valuation, your advisor will conduct an analysis to determine buyer attractiveness and owner readiness. The results will determine the plan of action required to create more value.

Brandon, are there any looming tax changes that would motivate a current generation owner to consider transitioning ownership sooner rather than later?

Now is a very good time to consider wealth transfer strategies due to current tax laws and the size of the lifetime exemptions. Currently, the lifetime exemption is the largest it has ever been at $11,580,000 per individual. Moreover, with the change in administration, there is a chance that significant changes will arrive in early 2021 or 2022, which would greatly increase the total tax cost of transferring wealth. With many asset values impacted by the pandemic, it is opportune to transfer the assets at lower values and allow the recovery to occur for the benefit of beneficiaries.

Leg two of the stool will lead an owner through the process of defining financial objectives, addressing legacy issues through estate planning and developing a tax strategy to minimize the tax liability of a transaction.

Peter, why is leg three so important?

Too often family business owners are so driven to create financial security for their families that there is little time to think about what their lives would be without the business. We have found that this is the most neglected part of the process. It is important for every owner in this position to think about the third act of their life. They need to determine what will make them happy and fulfilled and replace the time spent running the business. It is time spent reflecting back and looking forward to create a vision for the future without managing and being the figure head of the business.

Peter, why should family business owners consider developing an exit plan?

Only 30% of family businesses make it to the second generation, 12% to the third generation and only 3% to the fourth generation. Business owners must also take into account the fact that they are human and have no control over life’s circumstances.

Additionally, potential buyers (financial or strategic) recognize the value of a well-defined master plan. Sophisticated investors like private equity firms rarely invest in a business without a plan. Buyers understand the value of having a business owner knowing the strengths and weaknesses of their business and the effect on the valuation of the company.

If you are contemplating wealth transfer or family business ownership transition and need counsel, please contact us.

Brandon Zlupko
Cybersecurity and data server at a not-for-profit organization
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