Owners should have exit plan; Entrepreneurs need tax, succession strategies for when they step aside.

LAURA RAINES; For the Journal-Constitution

Timing is an essential part of a class act. You've got to have an attention-grabbing entrance, a spectacular performance and a strong finish. The same is true of your business.

You started with a sound marketing and financial plan. You've been performing and growing ever since. In 10 years, you'd like to retire to the lake or your next venture. So, what's your exit strategy?

"Baby boomers have been America's most 'entrepreneurialist' generation, and that's been good for the economy," said Patrick Ungashick, partner with White Horse Advisors LLC, Atlanta financial consultants to closely held businesses. "There are about 15 [million] to 18 million closely held businesses in this country and about 60 percent are baby boomers."

Closely held business accounts for nearly half of private sector payroll, generated about 80 percent of net new private sector jobs in the last 10 years and produces more than 50 percent of nonfarm private gross domestic product, according to a report by CMI, an Atlanta research and analytical services firm.

"About 60 percent of those businesses are owned by baby boomers, who are passionate about their companies, but say they don't intend to die in the saddle," Ungashick said. White Horse Advisors conducted a survey, America's Entrepreneurialist Generation: Exit Planning and the Baby Boomer Age Wave, to see how business owners planned to leave their companies.

"We found that nearly all owners thought it important to have a succession strategy, and most planned to exit within 10 years, yet only one in 10 owners had a written, up-to-date plan," Ungashick said.

Of the 444 respondents surveyed, about 58 percent expected to sell to a third party, 19 percent planned to sell to employees and 15 percent planned to pass the business down to family members.

"This has profound implications for our labor market over the next 15 years and also for the owners and their companies," Ungashick said. Owners stated their primary exit objectives were to have the financial freedom to retire and the peace of mind that family and employees would not be adversely affected.

Ungashick predicts that with so many baby boomer businesses on the market at the same time, those objectives won't be met for everyone. "Without a plan, owners won't be prepared for the tax implications for selling a business. They won't realize how today's decisions could have an impact on future succession," he said. "There are lots of things that a business can do legally and safely to minimize tax implications later."

Say an owner wants to leave a business to his son and gives him 50 percent ownership when he starts the company. That business grows to $35 million, so when the father is ready to transfer total ownership to the son, he has to pay taxes on $17.5 million. A more effective plan, Ungashick said would be to give his son 99 percent of the business at the start and serve as the managing partner with 1 percent of the stock. At transfer, he'd only be paying tax on 1 percent.

"Wrong decisions made during the life of a company can cost lots of potential tax dollars someday. The trouble is that owners don't know what they don't know," said Chet Zalesky, CEO of CMI. "A lot of people don't realize that on the death of a business owner, Uncle Sam wants his share of taxes quickly. It takes at least six months to a year to have the company evaluated and sell it, and if the company can't support paying those taxes, it's in trouble."

Having no plans to leave the business anytime soon, but wanting to be prepared in case something should happen to him, Zalesky and his senior colleagues began meeting with White Horse Advisors to write a succession plan. The plan had to answer how his family would be compensated, how the business would move forward and what documentation would be needed.

"It took several meetings and a couple of months, but we have a plan that we check in with quarterly and review annually," said Zalesky. "It pays to get expert help, because there really is a lot to learn. No owner has the time to think through the future implications of every financial decision and may not even be aware of an issue until it's too late. The sooner you start the better."

Ideally, owners should begin with the end in mind. Knowing whether they plan to leave the company to family or sell it can help an owner to decide on the most effective corporate structure for the long run.

Arthur and Sydell Harris were fortunate in knowing that their son, Richard and daughter, Karen, were interested and prepared to help run the business when they started Spa Sydell in 1982. "We decided to do it all together as a family business, knowing that someday my husband and I would want to be less involved," Sydell Harris said. "We were fortunate to be four talented individuals who wanted to work together."

In the beginning, Sydell was the aesthetician who delivered skin care services with the help of her daughter Karen. Arthur ran the business side. "Karen and I were both grown and had separate business lives and work experiences, but we came together to form the company," Richard Sydell said.

The company has grown to multiple Atlanta locations and about 550 employees. "When we talk about succession, it's not just the business, but the family," he said. "We've done a lot of work over the years to keep the lines of communication open. We don't take it for granted that we know each other's thoughts. When there's a major decision to be made, we have a board meeting and discuss it."

About eight to 10 years ago, Sydell and Arthur, who are now 80 and 82, became co-chairmen of the board, and Richard and Karen stepped into CEO and vice president roles. "It was a natural progression and we know the business is in good hands," Sydell Harris said.

J. Larry Tyler expects the same for his business, although he's not related to his successor. The president and CEO of Tyler & Co., a retained search firm that specializes in health and life sciences, wanted to make sure his company could thrive without him.

"It's tough making a good succession plan. We tried two that didn't work, but we're in the middle of our third plan now and it's working well," he said. He advises owners to start at least five years in advance of their exit. Now 60, Tyler plans to be a minority stockholder by 65, and out the door by 67.

Two years ago he promoted a proven leader and team builder within the company to executive vice president and chief operating officer. "We put him in a position to learn what he needs to know and made sure he was working with key stakeholders, clients and investors," Tyler said. Tyler gave him stretch assignments, like being in charge of budget-tightening measures, and began coaching him. He received stock options along with others in the company.

"I'm transferring stock gradually and the company is learning a new governance model. It's been a benevolent dictatorship, but now we have more stockholders," he said.

Tyler began thinking about his exit strategy in his late 40s. "You have to think about the tax and leadership implications together," he said. "I've written two books and there are other things I want to do after I quit doing search. My advice to owners is to have something to go to. It's easy to give up something in order to do something else."