Study by Columbia Business School and U.S. Trust Uncovers Financial and Emotional Challenges of Business Succession Planning

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The FINANCIAL — There has been significant sale activity seen in the private company space over the last few years as baby boomers head into retirement, yet many highly successful entrepreneurs are not well-prepared to give up ownership of their companies, or for what comes next, according to a new paper published on May 7 by Columbia Business School and U.S. Trust.

“The Owner’s Journey,” co-authored by Barbara Roberts, entrepreneur-in-residence at Columbia Business School, and Murray Low, director of entrepreneurship education at the Eugene Lang Entrepreneurship Center at Columbia Business School, takes an in-depth look at the sale or transfer of closely held businesses. Commissioned by U.S. Trust, which contributed expertise in succession planning and exit strategies, the paper follows eight successful entrepreneurs who nurtured and grew their businesses and then grappled with the challenges of letting it go. It includes first-hand accounts of their experiences shared, lessons learned, and reflections on what they could have done differently.

The case studies bring to life the emotional, financial and sometimes psychological factors that go into planning for the sale or transfer of a closely held business. The paper also includes practical tips that explore several themes, including:

Business valuation.
The differences between estate planning and succession planning.
Realistic timetable for succession planning and transition.
Assessment of the next generation of preparedness, capabilities and interest.
Personal financial considerations and the alignment of financial goals with personal values and goals.

“Building a successful business can be wildly exciting, all-encompassing hard work that also has led to great personal and family wealth,” said Roberts. “We know that it’s passion for what they are doing that drives most people to business ownership. While much has been written about the start-up and growth phases of entrepreneurism, little attention has been given to the challenges business owners face creating financial value when preparing for the exit phase and beyond.”

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Lack of insights about the transition process is at least one factor contributing to widespread lack of business succession planning. Insights on Wealth and Worth®, a survey conducted by U.S. Trust, has found that two-thirds of high net worth business owners have not established a formal plan for transferring ownership of their business, whether their intent is to sell the company or transfer it to family members.

“Eventually all entrepreneurs exit their business, by design or default, and the terms affect what’s next in their lives and those of their families, employees, business and community,” said Keith Banks, president of U.S. Trust. “The planless owner is often forced to exit on other people’s terms or under difficult circumstances without a meaningful transition or optimal pricing. Our intent in commissioning this paper is to help business owners learn from the experiences of others regarding the importance of the planning process.”

The eight business owners featured in the paper come from diverse industries and followed different paths to success. All have sold a business to a strategic or financial buyer or have transferred ownership to a family member for at least one generation.  Some of the entrepreneurs featured in the paper include:

The female CEO of a prominent East Coast industrial services firm who became the fourth generation to lead the company founded by her great-grandfather.

A young entrepreneur who followed his passion and grew a bootstrap company into a thriving business that connected millions of creative people around the world before being sold to a software company.

An orthodontist from a middle-class New Jersey suburb who, after buying the first specialty dentist practice outside Washington, D.C., spent the next 25 years building a thriving private practice and became a nationally recognized leader in his field.

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A small print-shop owner from Brooklyn who, after returning from World War II, invented an innovative process for color printing, and after 44 years made a family decision to sell the company to a strategic buyer despite three children employed in leadership positions.

The son of Jewish immigrants from Germany, who while attending law school, inherited ownership of the family’s food import business after his father’s untimely death. The company, which grew to a successful, mid-sized company and international brand, was also a family legacy, making the decision to let go of its ownership particularly difficult for its owner. 


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