Transition planning barely hits the radar screen
CEOs of the nation's fastest-growing private companies don't lie awake at night thinking about regime change for their business. Only 17 percent say positioning the business to monetize its assets is one of the most-important challenges they will face over the next 3-5 years. And, just 20 percent mention succession planning. In comparison, 82 percent cite retention of key workers as one of their most-important business challenges, followed by a long list of other management issues:
| Most-important business challanges: | Total | Extremely Important | Very Important |
 | | | |
| 82% | 43% | 39% |
| 52% | 22% | 30% |
| 36% | 13% | 23% |
| 34% | 10% | 24% |
| 30% | 7% | 23% |
| 22% | 6% | 16% |
| 20% | 5% | 15% |
| 17% | 5% | 12% |
"These CEOs are focused first and foremost on the pressing needs of the moment, rather than what may be perceived as distant endgame issues having to do with positioning the business for a sale, or who will eventually succeed them. Only five percent see either of these two transition issues as 'extremely important,'" said PricewaterhouseCoopers Private Company Services partner, Alfred Peguero. "For family-owned businesses that have been involved in transition planning, serious problems can occur if the transition has not been carefully planned and communicated to family members."
The majority expect to be bought
When asked about eventual transition out of their business, many of these "Trendsetter" CEOs have more than one likely exit plan (an average of 1.5) in mind:
- 62 percent expect sale to another company;
- 29 percent a management buyout;
- 22 percent a sale or transition to next-generation family members;
- 19 percent an ESOP (employee stock ownership plan); and
- 14 percent an IPO
Those expecting to eventually sell to another company are comparatively faster growers--targeting a revenue increase of 21.5 percent over the next 12 months, or 34 percent faster than companies with all other exit strategies. Those considering an IPO as a possible exit plan expect much faster growth (35.9 percent) compared to those anticipating sale/transition to family members (16.4 percent).
"When it comes to disposition of their business, it would appear that most simply expect to be acquired when they are ready," said Peguero. "But, in reality, convenient timing and proper preparation cannot be taken for granted."
Family plays a role
"Trendsetter" CEOs and their family members tend to own a majority stake in the business--averaging 54 percent of the asset value. But, 30 percent do not have an estate plan in place that addresses disposition of the business.
Although few overall--only 29 percent--consider theirs a “family business,” when it comes to transition, blood runs thicker than water. Among these "family businesses," a considerably above-average 51 percent mention sale or transition to next-generation family members as a likely exit plan.
"Perhaps more of these CEOs do not place a near-term priority on succession planning because they and family members control a majority stake--but fewer than half have an estate plan that speaks to disposition of their business," said Peguero. He added, "It appears that self-described 'family businesses' have a degree of self-fulfilling prophesy about them, with the CEO much more likely to consider a sale to next-generation family members."
Uncoordinated planning for family-owned business and personal needs
"Trendsetter" CEOs tend to take an ad hoc approach to planning for their business and personal needs. Only 33 percent use the same lawyer for both. Overall, only 75 percent are receiving income tax planning for their business, and 61 percent for their personal needs--and only 12 percent see this as an area where improvement is needed.
"Unless tax and legal advice is coordinated for family businesses, the likelihood is slim that the transition plan will be successful," said Peguero. "I see it every day in my practice--parents or grandparents who did not properly plan, who left their heirs with large tax burdens, rather than what they intended to be the fruits of their labor--financial freedom."
Few have an independent board that can advise on transition
Often "Trendsetter" CEOs do not have the benefit of a board of directors that can pick up the slack, and advise on transition planning. Only 41 percent have a formal board with independent outside members.
The typical board is comprised of 6.4 members. Fifty-six percent meet quarterly; eight percent semi-annually; 11 percent annually; and 23 percent "periodically." Fewer than half of those with a board, only 46 percent, say it discusses succession plans and related needs.
"In net, only about twenty percent of these up-and-coming private companies have a formal board with independent members, that advises on issues like preparing for a sale or an eventual transition at the top," noted Peguero.
PricewaterhouseCoopers’ “Trendsetter Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 144 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: www.barometersurveys.com.
