Rick Van Valkenburgh, CPA, is a Tax Partner with Larson & Company. He specializes in tax planning and preparation for small businesses and fast-growing companies.

A true story with helpful tips and warnings

Brad was the picture of health and vitality.  At age 66, he rode his mountain bike three to four times a week.  He had a pullup bar mounted in his bedroom doorway at home and used it every morning and he enjoyed challenging able-bodied clients to try the rotating pushup handles he kept in his office.  Physically, he looked like he might live forever.  His clients loved him and couldn’t imagine the day when he would no longer be able to prepare their tax returns.

After working in the airline industry for 20 years, most of that time loading and unloading bags onto and from airplanes, Brad took the leap and made his part-time side gig his full-time day job.  He retired from early Delta Airlines and opened his work-from-home tax preparation business.  His business grew as more and more people from all walks of life came to know and trust him as “their tax guy”.  He eventually moved out of the home office and hired his first employees.  Everything was going better than expected.

Not wanting his daughter and son-in-law, Rick to move out of state with his first grandchild, he made an offer to Rick to work for him with a promise that he would one day have some ownership in the business.  Rick was, after all, just finishing up his Master of Professional Accountancy at the university and would soon become a CPA himself.

Over the years, small amounts of ownership were transferred to Rick and a hazy idea had occasionally been discussed regarding Brad’s eventual retirement.  Brad and Rick both knew the day would come but it seemed so far away and the details of how to completely transfer the business to Rick in a way that would allow Brad to retire comfortably were always put off to some future day.

There seems to be some hesitancy in all of us to contemplate the consequences of aging.  It may be even harder for small business owners, who often times have built their small business from the ground up.  The business is their baby, and they can’t conceive of handing it over to someone else.

But, as we all know, life happens.

After almost 30 years of being self-employed, Brad began showing signs of memory loss.  It came on slowly, at first.  Almost imperceptibly.  So much so that he and his wife were totally unaware and skeptical of what their children, who began to take notice and expressed some concerns, were telling them.  Within a year, Brad was officially diagnosed with dementia and was unable to continue providing the level of service upon which he had grown his reputation.  Something needed to be done, and fast.

Because there was no clearly defined succession plan in place, there seemed to be only a few options; 1) tell most, if not all, of Brad’s clients they would need to go somewhere else, or 2) hire qualified employees to try to continue to serve Brad’s clients, or 3) look for a firm with whom to merge.  While there may have been other options these three seemed to be the most likely.  However, in each of these options, there were significant obstacles to overcome.

If Brad’s clients went away under option 1, how would Brad and his wife receive the financial reward for a lifetime’s worth of the hard work of building a successful business?   Under this option, there would be no value in the business and, therefore, no source of revenue to provide for them in their years of need.

It may seem counter-intuitive, but the more the success of a business is centered around a single individual or small group of individuals, the less valuable the business is.  If that key individual or group of individuals is unable to serve their clients or customers, the business will typically die on the vine.

While option 1 was not desirable, options 2 and 3 faced some common obstacles; would Brad’s clients willingly transition to different tax preparers.  Remember, they loved Brad so much and had spent so many years working with them.  He was “their” guy.  While this often makes the main guy feel good that so many people trust and depend on him, it can also be a significant reason a business is devalued.

Over the 20 years of working together, Rick had built his own book of business and did not have the capacity to serve Brad’s clients in addition to his own.  It would be necessary to hire employees to try and replace Brad’s production.  This was an almost impossible task because Brad was very good at what he did, and he knew so many of his clients so well.  In consequence of his skill and internal knowledge, there was a lack of documentation that would be useful, even necessary for those who tried to step into his shoes and take on his workload.  It would have taken at least 2 or 3 employees to fill the gap, and at the time, the labor market was very thin, especially for professional tax preparers.  It would have also been very difficult to cover the added payroll and overhead costs, leaving little or nothing for Brad in the end.  This option just didn’t seem very feasible.

Luckily, an opportunity presented itself and a larger CPA firm took pity on the plight of Brad and his business and was willing to make an offer.  As lucky as this was, there were significant challenges associated with the transition of Brad’s clients to new tax preparers and a new system within the acquiring firm.  Many clients chose to go elsewhere, and the valuation of his business is still somewhat in question.  However, this opportunity truly seemed heaven sent and provided Brad a fair and reasonable buyout.  Such “luck” shouldn’t be the basis for a solid plan of succession.

Some points to consider in preparing for succession:

  1. Don’t put it off. Life happens at any age and almost always without warning.
    1. Meet with your CPA and attorney to begin the process immediately
    2. Have a buy/sell agreement in place and fully funded
  2. Identify individuals to include in succession planning as early as possible
    1. Any close family members in the organization with potential for management responsibilities and ownership?
    2. Potential ownership opportunities are a great way to incentivize good employees to stay with the organization
  3. Think carefully about what creates value in your business
    1. If there is a small number of individuals in the organization that are crucial to its success, the value of the business decreases because of the risk associated with losing those key individuals.
      1. Find ways to increase the value of all individuals within the organization
        1. Cross-train all essential tasks
        2. Empower those at all levels to take ownership in what they do
      2. If there is a small group of products or services that generate almost all the revenue, try to expand and diversify
        1. Don’t lose sight of what you do best but prepare for the possibility that limitations on the service or product might inhibit future sustainability, which risk decreases the value of the business.
      3. If there is a small group of customers or vendors that are critical to your success, do what you can to expand in those areas, if possible
        1. A single customer or a single vendor decreases the value of your organization because of the risk of losing that single customer or vendor
      4. If succession from within the organization seems unattainable, seek to identify potential buyers
        1. Learn what would create value for potential buyers
        2. Build your brand to fit with theirs
          1. Needed modifications should take place well before succession becomes imminent

Here’s an interesting article from The Motley Fool regarding the lack of succession planning among small business owners: https://www.fool.com/careers/2018/08/03/most-small-business-owners-lack-a-succession-plan.aspx

Here’s another interesting article from CNBC suggesting a “Tsunami” of change as it relates to the succession plans of millions of baby boomers who are small business owners: https://www.cnbc.com/2019/12/10/as-baby-boomers-retire-main-street-could-face-a-tsunami-of-change.html

The lesson here is to involve advisors and employees in a succession plan long before you think you will need it. An experienced CPA can help you plan succession strategies. For more assistance with financial business planning, contact your Larson advisor today.