Better Roads Digital Magazine
Issue link: https://read.dmtmag.com/i/115354
FinancialDistrict the company. But only 16 percent of respondents say the recession has caused them to put their plans on hold. Recession or not, 42 percent have yet to begin an ownership transfer plan. Notably, a portion of those are younger than age 55, so they have time. Others do not have as much time to plan and execute a transition plan, and it does take time. We have also found that more of the baby-booomer genration owners are intentionally creating what we are calling a "lingering ownership transfer plan." Ownership transition planning for I have a formal plan in place to transition myself out of managing the business: 63% 37% No Yes engineering and construction firms has historically focused on a transaction, with retiring owners selling to the next generation. The transaction typically took place over a period of years and had a defined end. FMI is seeing a shift in the way sellers think of "retiring." Sellers are taking a slower approach to the sale, and sometimes the process does not have a defined end date. Thus the "lingering ownership transition." Several factors are driving this change in thinking: 1.People are living longer – the prospect of living to 90 or 100 means that retirements are longer, which, in turn, implies that retirement income may potentially be needed Others sincerely want to sell and move towards retirement, but are unsure how to proceed in the new environment. Some business owners feel the need to tie in the next generation with ownership, but are not sure they are ready to make the full transition. For these owners we see what we call a "lingering ownership transition strategy." It works like this: 1.The selling owner(s) begins a process of selling a portion of the business to the next generation with the intent of retaining 10 percent to 51 percent of the company indefinitely. for decades. 2.Traditional retirement investments have been underperforming for more than a decade. Since 1999, the stock market has been essentially flat, interest rates are nominal and real estate has struggled. The strategy of living off the income from traditional retirement investments is not working very well. Trading stock in a profitable private business for traditional retirement investments is not very appealing economically. 3.Many business owners want to stay engaged in their businesses. Pure If I were to leave the company tomorrow: I have a team of strong managers who could easily manage the business in my absence. I have management that needs further development. I have a buy/sell agreement that dictates what happens to my company's stock in the event of my death or disability: 49% 84% 47% I have no capable management and will need to hire someone from outside my organization. 4% retirement does not appeal to all. The traditional model of working until the magic number of 65 is no longer desirable to many owners who still want to contribute while reducing their time obligations. 4.Government's role in the economy undermines confidence in the future. In combination, budget deficits, trade deficits, the falling dollar, entitlement liabilities and expectations of rising taxes undermine the confidence of business owners. Will inflation and taxes eat away at personal net worth and the retirement nest eggs in coming decades? The reaction of some business owners to this environment is to put off transition planning indefinitely. 16% Yes No 2.Selling owner(s) continues to work, drawing salary and benefits while transitioning responsibilities of lesser interest to himself to the next generation. 3.Put in place a buy/sell or stockholders agreement that protects the business and is in the best mutual interest of both selling shareholders and the next generation of shareholders. 4.Sellers maintain a flexible transaction structure that allows them to retain some ownership indefinitely, but also a structure that can be accelerated should full retirement be desired. The advantages of this structure for the seller are that it maintains income for the indefinite Better Roads March 2013 21