JofA-branded podcast: Critical conversations about business transition planning

In this Journal of Accountancy-branded podcast, a senior wealth strategist and managing partner share advice on how to initiate conversations with business clients about transition and succession planning.

Play the episode below or read the edited transcript:

Transcript

Introduction: Thank you for joining us for this Journal of Accountancy branded podcast. This episode is from our sponsor, wealth management firm Choreo. Clint Costa, a senior wealth strategist, and David Winslow, a managing director, share advice on having critical conversations with clients about business transition planning.

Clint Costa: Hi, everybody. I’m Clint Costa, senior wealth strategist at Choreo. If you’re not familiar with us, Choreo is a nationwide wealth management firm founded at the intersection of tax and wealth. A key part of our work involves collaborating with CPAs and accountants to support our mutual business owner clients. That brings us to today’s podcast. Our goal is to equip and encourage you to have those challenging but crucial conversations about business transition planning. I’m pleased to introduce my Choreo teammate who will join me today, David Winslow.

David Winslow: Hey, good morning, Clint. Thanks so much for having me. For all those folks out there, I’m David Winslow. I am a managing director with Choreo. I sit in beautiful Charlotte, N.C., and really spend almost all my days meeting with business owners, entrepreneurs, talking about their challenges and their opportunities. Clint, thanks for having me.

Costa: Absolutely. A little bit more background on me, I spent 15 years as a practicing attorney here in Chicago, also working with financial advisers, CPAs, on our mutual business owner clients, really trying to get all the way around the issues that those business owners face on a day-to-day basis. David, I’m ready for a great conversation today.

I think one of the things that was seemed very clear to me as a practicing attorney and now obviously here within Choreo internally is that, when you talk to a business owner, they seem to always know and agree that having a transition strategy is important. Then, when you start asking for the documents, you hear a lot of crickets, and it’s unclear if anything has been done. I think that seems to be a common thread among business owners.

Winslow: Yeah. Absolutely. I saw a stat recently that the Exit Planning Institute put out, and I think their stat was 48% of business owners have done no planning at all. When I saw that stat, I thought to myself, that number actually seems too low almost, that I think there might be a little bit of an embarrassment bias with a lot of business owners that don’t want to admit that they’ve done no planning.

Anecdotally, in my practice, I would say only maybe 20% of business owners and entrepreneurs that I work with, maybe two out of 10 really have given this much thought and put any kind of structure around it. Certainly one of those super-neglected areas that I think accountants can be a leader in terms of trying to raise more awareness around from my perspective, Clint.

Costa: I agree. I think it’s one of those things, too, where the tax, the accounting, that relationship can be a terrific lead-in to understanding, is there something? You mentioned the embarrassment bias, which I agree. I think there’s also a level of set-it-and-forget-it bias where something was done potentially in the past. Maybe it was a transition plan of some kind. Maybe it was just other documentation that the owner didn’t fully understand and wasn’t actually a full and complete plan.

For those who have a plan, those can get outdated very quickly and not really represent what the owner desires over a period of years. One of those things also that I think we see a lot is there are so many transition options for owners to consider. They may talk to their CPA or attorney who saw an ESOP work out really well.

Then they talk to somebody else. They talk to a deal intermediary or an investment banker, who’s talking to them about all the terrific options for selling a business and how big the multiples might be in a particular industry. Then they talk to their kids, who are maybe interested in having the business. Then they start thinking about internal succession.

Do you notice that business owner clients, do they seem overwhelmed with the transition options? What are you seeing most typically among middle-market business owners?

Winslow: First of all, I think most business owners really agree and support that they need to be doing the planning work. I think, I’ve seen one stat that, from that same study, it’s like, 90% of business owners either agree or strongly agree that they need to be doing business succession planning and thinking about that planning work. From my seat, I’m trying to square, 90% of business owners know they need to be doing this, but only 20% do it. What’s the cause of that? I think a big reason why they don’t is because they just don’t understand it, they don’t know how to get started, they don’t know what the options are, etc.

I just think they get a little bit overwhelmed, to your point, because you’ve got private equity as a choice. You’ve got ESOP. You’ve got transitioning internally. You have all these different options. The question is, what’s the right one for that business owner, and that’s where the focus has to be less about the solutions and the options and about the process. How are we going to get from point A to point B? That’s a key part of, I think, the value that we provide at Choreo working with you.

Costa: Yeah. I think that’s right. I think that to get your arms fully around the options and to create a process for figuring out what the right option is for the owner, it does require a team approach. That process, every piece of the professional team has a piece of that puzzle that they bring to the table, and that’s where working together really does benefit our business owner clients together. Thinking about the options, thinking about what are the right things to be talking to owners about, sometimes I’ll bucket that off myself into a couple of different categories of business owner.

I think of the owner/operator and maybe the entrepreneur as two different archetypes of business owner that have different types of businesses, different focuses, and different planning issues. What do you think about that, and how would you think about those different categories of business owner and what those categories mean to the process that they need to pursue?

Winslow: Yeah. I think I agree with you that those are, at least, two of the most prominent profiles. Maybe not all of the profiles, but I think they are two of the most prominent ones that we see. To me, the owner/operator, you visualize in your head, family business, maybe been in the family for multiple generations. They have no intentions of ever exiting it in a traditional sense, that it’s all about sustaining it. What do we need to do to sustain it and transition it efficiently?

I think you got a profile that looks like that. Then you have a profile that might be more like the serial entrepreneur who is going into a startup with the idea that the plan is to exit it already. Those discussions are totally different. The owner/operator, to me, it revolves around a lot of family dynamics issues sometimes, or revolves around building a strong management team, etc.

The entrepreneur is more, how do I scale this? How do I ramp it up as quickly as possible? What do my exit solutions look like? It’s a totally different playbook and feel, but ultimately, again, we’re trying to follow that same process because ultimately we want the best solution for the ownership group.

Costa: Yeah. I agree. I think anecdotally from my perspective, in my practice, both here at Choreo as well as previously as a tax attorney, the entrepreneur mindset is exactly what you described. We’re starting this, and we know that the end is an exit. We’re maybe starting with the exit in mind. Sometimes that can lead to more technical considerations, in my experience. Those types of folks might be far more interested in the technicalities of qualified small business stock under Section 1202 of the [Internal Revenue] Code. If you’re talking to an owner/operator, those opportunities may exist as well, but it’s much more of the relationships. It’s what you described.

How are my kids going to feel about having professionalized management built in, and ultimately, they’re going to answer to some outsider if that’s the right solution versus are my kids ready to take part in this business to really step up? Are they at that stage? How do I create a structure that gives them the ability to step up if they’re not ready at a time when I can’t do it any longer as the business owner. I think what that also leads into is really the question of what transition events are we planning for?

The way I think about it is there are really two primary transition events. If we’re starting on the process of focusing on transition planning, there are the involuntary and also then the voluntary transition events: What happens if we get to choose our destiny versus what happens if the proverbial bus hits us and we maybe have a shorter time frame or no time frame to actively try to create transition plans? What do you see with clients when you talk about these two different events, and what are your thoughts on these events and the planning process?

Winslow: Yeah, well I’m pretty direct with business owners. I’ve been doing this a long time, and you start to get very direct as you get a little bit older. I tell a lot of business owners and entrepreneurs, listen, you’re going to have a transition event. It’s going to happen. It’s not optional that you’re going to have a transition event. So, it’s going to happen. The question is, is it going to be involuntary or voluntary?

We try to think about the involuntary first because to me, that’s the real catastrophic plan. And a lot of these owners have built super-valuable and super-thriving businesses, and they really don’t have a concrete plan to protect as an asset. They’ve got homeowners insurance on their houses, and they’ve got liability insurance, and they’ve got all these safeguards around a lot of their assets but have neglected usually the one that’s going to be 90% of their balance sheet. From my perspective, it has to start there, but there’s going to be an event. We just need to be prepared for both.

Costa: Absolutely. There’s a 100% chance that all of us will at some point pass away. We have to be ready for that. Again, I think where my head goes with a lot of that is really the multidisciplinary nature of all of this. It’s the group or the person or the professional that knows the business the best, that knows the owner the best is there in the trenches all the time, probably is the best starting point.

But then, ultimately, and maybe that’s the CPA, oftentimes it is. From there, working together with the financial advisers, with the attorney to ensure that everything from the buy-sell agreement, the management structure, the estate plan, etc., is really set up well to provide for as smooth a transition as is possible in one of those involuntary transition events is key to really, as you said, protecting the company as an asset and ensuring that all that work that has gone in to building the company doesn’t end up being lost to an event that we all knew was going to happen, just couldn’t determine exactly what the timing was.

I think oftentimes, too, once we have started working and thinking about these things with business owners and these transition events, we have to work through the objections. Because I think any business owner is going to have, potentially, at least in their minds, better things to do with their time and maybe their money and effort. That’s just how business owners tend to be built. We think about voluntary transition planning to start — even though we really want to focus on involuntary as the baseline of our planning process — but when we’re thinking about voluntary and even involuntary transition, David, what are your thoughts on typical objections you hear from business owners and how do you overcome those objections to really continue along that process?

Winslow: Yeah, again, my anecdotal experience has been that they’re going to usually revert to, “It’s just not the right time.” Sometimes that’s accurate. To me, a lot of times that also is just a red herring a little bit in the sense that they’re not ready to mentally and emotionally start to cross that threshold of thinking about an exit at some point. I think the emotional side of that guides so much of it, and they’re going to say, “I’m too busy right now to focus on it.” That’s probably at least 75% of the reject — the first thing is, I’ve got too much going on right now to be able to think through some of those issues.

I think that’s the No. 1 thing. The one thing that’s not necessarily an obstacle, but one of the core things that I talk with owners about, though, is when you’re talking about a voluntary transition and thinking about an exit, a lot of times the capital markets also may play a big part in that. What you’re really looking for is alignment that the owner is ready and the external market is also receptive to it. We just went through a time period where if you sold in 2021, it was a great time.

Multiples were high, cost of capital was low. Fast forward into 2022, interest rates shoot up, multiples start to come down. Not a great time to be selling at that point. What we got to do is we have to be ready for both scenarios. We need to be ready when the owner’s ready, and we need to hit it when the capital markets are at a good point, at least in my anecdotal experience, Clint.

Costa: Yeah, I think that’s right. I think in my experience as well, I think you’re spot on. I think that there’s a lot of, with respect to voluntary transitions and potentially sales or other liquidations of the business, there is also a lot of psychology and emotional questions for the owner to think through. Very likely, especially in situations where the owner built the business from scratch, that business is a third, fourth, fifth child. It’s infused with purpose, it’s infused with a lot of what we as humans sort of take for granted and the basic reasons of why we work and why we do things.

When you confront an owner with just maybe a high multiple, if the markets are right for that, it doesn’t maybe move the needle as much as we would think in terms of a large dollar figure being placed in front of somebody who is probably relatively comfortable and doesn’t need to think as much about the monetary aspects as the other aspects around planning and long-term structure of the family.

What I think about involuntary transitions and the utter importance of planning for involuntary transitions, there are some objections there as well from owners when we start talking about and, as a former estate planning attorney, still dealing with a lot of estate planning issues here at Choreo, optimism bias is oftentimes one of those things that allows owners and others to put off some of these negative scenario-planning situations. What happens if you pass away? What happens if you become disabled or incapacitated? Who’s right to steer the ship? Those questions are vitally important in the involuntary transition planning world. What do you see, David? What’s sort of the ethos you go into trying to help owners with involuntary transition planning?

Winslow: Well, the biggest issue I see in my practice is awareness of the issue. I’m constantly amazed that there isn’t more awareness that the plan that they have in front of them is no longer adequate. You did this as a practicing attorney, but I think a lot of attorneys start with, it’s a startup business, so it might look very basic at the beginning and then it just never gets revisited.

I’m sure not for you Clint, because you’re a superstar attorney that you would have been on top of these things. But I think a lot of it, I see, they’ve just outgrown whatever was done in the shareholder agreement or the buy-sell. The planning has not kept up with the growth of the business, and they’re just not aware of it, so it’s an education thing at the beginning. Then I think you’re spot on with the optimism bias.

I recently met with a very successful two partners that own a high-growth restaurant company, and one of the partners wants to do a lot of planning work because they’re concerned about the future of the company and an involuntary transition. The other owner is very reluctant to engage on this and his refrain is, “It’ll all work out. We’ll get to it. If something happens, it’ll work and we’ll figure it out.” Obviously, in our planning world, that’s not the right answer, but I think it’s anchored in these entrepreneurs because a lot of them have figured it out. Through the years, this group’s navigated COVID in the restaurant business, and it worked out. That’s just how they’re wired.

Costa: That’s right. I think that involuntary transition planning is just, from our perspective, so key and, to your point, there are lots of biases that make everyone think, well, maybe we don’t need to worry about that today. We’ll worry about it tomorrow. But for the CPAs and accountants who are vitally important to these business owner clients who may be listening to this podcast, I think if we could drive home any point or a primary point on where to really focus efforts, it’s on that involuntary transition plan just because of the high severity of that impact.

It has to do also with why we as homeowners, car owners, in every aspect of what we do, buy insurance. We’re worried about high-severity impacts that will have lots of reverberation through the family, through the business, through even the community in some aspects. Oftentimes, when we think about the high-severity impact where, David, where my mind goes is taking an old buy-sell agreement and walking it through with the owner to show them again, anecdotally in most cases, just how utterly improper and problematic that buy-sell agreement puts the family, what position it puts the family, puts the business in. Is that your sense also in terms of driving home how important this involuntary transition planning is to business owners?

Winslow: I think you’re spot on. I think this is where the emotion kicks in and can create a sense of urgency if you frame up, “Here is what the impact is if we don’t get this planning addressed.” This involves to them things that are incredibly emotional. It’s their family. It’s their employees. It’s their stakeholders. It’s the community, as you talked about.

These are things that for a lot of entrepreneurs and business owners are the anchor of what they do all day. It’s less about them than it is about than the rest of the stakeholders that are around them. I think it’s exactly how you can get them motivated to start to take action is thinking about that high-severity impact.

My experience has been, and this is what I encourage advisers and accountants to focus on is, if you can engage them in the involuntary, it becomes the gateway to the voluntary. It opens up the conversation now to be thinking beyond the next 30 days or the next quarter of their business, and it forces them to start having some of those harder, strategic, long-term conversations. The involuntary becomes the gateway to the voluntary, in my experience, if you do it the right way.

Costa: It’s a great point, David. I think it leads well to the question of once that really takes hold and for the CPAs and accountants who are vital to their business owner clients and have those long relationships where they’ll have a lot of credibility bringing this up to those clients. The next step I think, is really rounding up the team.

We’ve talked a little bit about the idea that no single adviser necessarily has all the pieces to the puzzle that it does take a team. I wonder, what are your thoughts, David, on, who comprises that team? And then secondarily, let’s say you are a CPA or you’re an accountant, maybe you’re even the CFO internal to the company, or you just have that deep relationship with the owner, where they’re really going to listen to you. What is that team approach made up of? What would be a next step in terms of rounding up that team, and how should someone think about who should be on that team to really start that process?

Winslow: In my experience, Clint, the team is always a little bit different based on the circumstances. It’s a legacy of who they’ve worked with in the past and how complex the business is, and how big it is. The normal players that we’re trying to pull together are going to be they’re accountants, and it’s going to be their attorneys, whether that’s corporate or estate planning, could be a banker that’s been very instrumental in their growth. Then there’s going to be some internal stakeholders.

A lot of times I might see a board of advisers or directors. You might have a CFO or a COO involved because, if it’s going to be an internal transition or an external transition, those people are really vital in terms of trying to get things ready. I think building that team is vital. It’s step 1 in the process, and I think the other thing that’s really vital, Clint, is somebody’s got to lead that team.

Traditionally, that’s been a role that we’ve tried to take on at Choreo for most of the entrepreneurs we work with because there needs to be a natural lead that ensures that the collaboration goes smoothly, that there’s a process in place. I think what I’ve traditionally seen that doesn’t work is when the entrepreneur owner themselves are trying to lead that team that they’re sitting in the hub, and all these advisers are around the spoke. They’re trying to take information in, and they’re trying to lead this, and it’s not their natural state. It usually is not as effective, and so we tried a different approach which we think works well.

Costa: I think that the team, to your point, David, one of the things that I was keenly aware of as a practicing attorney, and I think a lot of practicing CPAs and accountants will intrinsically understand this as well. When you traditionally operate with a client on an hourly or even a project basis, you do have if you’re taking up a new set of planning challenges that the client hasn’t come to you with specifically.

We are being very proactive and serving our clients really well by bringing up transition planning. It can be hard to do that. It can be hard to justify the time if you’re in a practice that bills by project or bills by the hour because there won’t necessarily be some of that give and take. That’s one of the areas that I’ve been here at Choreo for now two and a half years.

I do agree with you. It requires someone to really manage that project and, oftentimes, the financial advisers are keenly aware that, again, they only have a piece of the puzzle. We need every other adviser at the table with their best advice. But allowing us to run that process, I’ve just seen it work so many times and in practice, I always appreciated it because it kept things moving.

As you said, it didn’t give the owner a new job to do that they probably didn’t want and weren’t going to be good at anyway certainly. At the end of the day, really allows the team to flourish where there’s a clear quarterback. But, as we know in football, a quarterback does not make the whole team. A quarterback cannot do everything on the offensive side of the ball. So we absolutely have to have every other team player ready and able to go, but we need someone orchestrating that.

Whether that’s the financial adviser or the CPA, or the attorney, or whoever has that relationship and that capacity, I just know that some of the challenges of the billing arrangements we enter into in different disciplines can make it a little bit harder. We can get there, and we can ultimately do really well for our clients and continue to do well for ourselves as professional advisers by really embracing that team approach.

Once we get the team together, get the documents that we need, are able to set a baseline, we start to talk. I think among the planning team, we want to start having those discussions among the team members. A variety of questions, I think, come up, and it’s ideal to get a variety of perspectives because each team member is going to see something different.

What are some of those questions? What are some of the ways that you like to interact with the team once it’s ready, once it’s been identified, and we’re ready to do all that pre-work to bring really impactful insights to the business owner on transition planning?

Winslow: My starting point when I’m leading the team, I think there’s two elements or dynamics, or paradigms. Clint, there’s the readiness around the personal. Are they ready personally? Have we done the cash flow planning? Have we done the estate planning, etc.? There’s a conversation around whether or not the owner is financially and emotionally ready to go down this road. Then there’s a conversation around, is the business ready? Is the accounting claimed up?

Is it a good time, or does the management team need to be enhanced if we’re thinking about an exit? If there’s future generations, have they gotten the right coaching? Are they ready to step in? The conversation bifurcates between let’s talk about the personal elements here, let’s talk about the business elements, and ultimately, we need to get those both to a point where we’re getting a green light. We’re ready to go. The business is ready. The owner is ready. Then it becomes less about what are we doing? Then how can we execute in the most effective way in the most impactful way, Clint.

Costa: I agree. I think, I wonder, too, David, what you think about this. My sense is that, once you’ve got the buy-in from the team, you’ve gotten all of the best thoughts and insights the team has to offer. You’ve then taken that to the owner. From my perspective, I think what oftentimes may, in a way, stop some professional advisers short of doing this, and even some owners once they get into the process, is some of the lack of clarity. If I’m a terrific accountant and I’m looking at my client’s accounts receivable, and I can tell that we’re slow on collection. Or if I’m looking at my owner client who just let me know that they’re going to acquire some new real estate or break ground on some new building, and I can talk about a cost segregation study, these are things that are very finite and very tangible, and I can directly evidence and prove out to the owner how we can make the business better by addressing those issues.

With the transition-planning process and the discussions that have to come along with it, it may not be quite as tangible, especially upfront. Ultimately having the discussions is important, but I always wonder if developing goals and a timeline and tasking to really keep the process in line is just vital at the very front end of that, in terms of what you’re actually doing on boots on the ground as the transition-planning process is being conducted. What are your thoughts on how to evidence what’s happening to the owner, ensure that the owner remains engaged, and also ensure that the team stays cohesive?

Winslow: I mean, the analogy I use is, most successful entrepreneurs do business planning. They have a plan in place that they’re executing in terms of the daily operations of the business. It’s not like they just walk in every morning and there’s no real plan, and there’s no forethought. I do have some that do that, but most don’t. I mean, most successful entrepreneurs have a very concise business plan that they’re executing on with their CFO or management team or COO or whoever those stakeholders are. The analogy I use is, we’re doing the exact same thing, Clint.

Like, we’re running this like it’s a business plan. We have a plan in place that has a timeline. It’s got tasks associated with it. It’s got milestones that we need to reach. It’s got KPIs. I mean, we’re doing all the same things, just within a different context or construct. A lot of times, when you frame it up like that with them, they get it at that point, because they understand that a strategic plan takes planning and execution if you want to get the right outcome.

Costa: I agree. I think where I’d transition from there, David, is let’s say that I’m a CPA, I’m an accountant. I’m the vital cog in the wheel to the business owner. I’m helping with tax. I’m helping with reviews and maybe even audits, and I’m there to provide that outsourced accounting and all the great services that accounts and CPAs offer to clients, I’m vital in that business. From your perspective, where do I start?

Winslow: My experience has been accountants are superb at identifying the needs of their clients and where we have gaps. They know their clients super well. They know their businesses super well. They know them personally very well.

The reason that there’s a trusted adviser is because I think they got that knowledge of they’ve got needs, and I understand that. Where there’s more of, I guess, a shortfall or challenge is an accountant being able to transition the need that they see into action? They just don’t have the right words and the right process in place to say, “You have a need. We need to review these things and creating that sense of urgency.” But I found that they understand the need. It’s more about how do you get the client to engage is where the obstacles start to come up. But I mean, I tell my strategic accounting partners, you need to have this conversation that we’re talking about today with every single business owner you have, and you need to revisit that conversation periodically to make sure that it still works. I think it’s about identifying the need, getting them bought in, and then starting to have that team-based approach around what are we doing here?

Costa: I agree 100%. David, I think, some final takeaways here. My sense, and it was literally just on a call recently where this came up. It was really driven by the CPA. It was driven by some technical issues that have come up recently in the tax world but really could have been driven by any number of issues in reality. It’s a transition plan really driven by a desire to look at what exists today and figure out if it still meets the needs of the family. This is probably what we would term as the owner/operator family. The goal is to keep the business and the family. The family has been very successful, the business has been successful. There’s all sorts of issues — estate tax, estate planning, tax planning, in general.

Where this opportunity really came from was the CPA who works with the CFO of the company on an almost-daily basis. The CFO brought up a question, and the CPA really said, “Oh, gee, that’s a good question. There’s this technical issue that’s out there that’s timely. Let’s bring in a team.” I really, in my estimation, I thought, what that really highlights is the idea that first of all, that CPA is absolutely in the best position to know that this is a current issue and really the first-choice adviser to the business owner. Then, second, kudos to that CPA for drafting in a team and ensuring that the services being provided, the efforts being utilized are really geared toward the best interests of the client. I think that CPA quickly realized that they needed a number of additional outside professionals to assist, and luckily we were one of those calls.

But my hat’s off to that individual from that perspective. I think that that maybe is just, anecdotally, a great insight for folks who are interested in potentially taking up these conversations, have maybe identified those particular clients that they’d like to do this for, and ultimately, there will be more to come. As we’re all interested in having work to do, there will be plenty of work to do, but it’s the melding of the best interests of the client and our ability as professional advisers to deliver top-notch service. What are your thoughts in closing, David?

Winslow: Well, I mean, I agree with you 100%, but my overriding of thought is, this is the most important conversation that advisers can have with a client. Like, this is the most vital conversation that a CPA can have with their client because it speaks to the very viability of the company itself. But it’s also a win-win for an accounting firm. I mean, I spend a lot of time with the accounting firms, and the best-managed, highest-performing accounting firms understand that transition planning is also really good for business.

I mean, most of the accounting firms that we work with have just an outstanding platform to help a client through a business transition. I mean, they’ve got the accounting services. They’ve got IT consulting. They’ve got valuation services. They’ve got management consulting businesses. They’re in a position where they’ve got a tremendous amount of resources to bring to bear to help clients through this, and they’ve got the trust of the owner. They need to be leading on this with firms like Choreo, and it’s a win-win. It’s a win for the client, and it’s a win for the accounting firm.

Conclusion: Thanks to Clint Costa and David Winslow for their insights, and thanks for listening to this Journal of Accountancy-branded podcast.