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Trusted Advisors: Essential for Smooth Succession Planning

Sam Brownell - tax
Sam Brownell, owner and founder of Stratus Wealth Advisors

But should you ask your Uncle Steve to draft your buy-sell agreement?

As we frequently discuss in our articles and webinars for LBM Journal, succession planning is a critical process for LBM dealers as well as their families, employees, and customers. During the succession planning process, dealers will need ongoing guidance from trusted advisors with ownership transition expertise. However, complications may arise when a family member assumes this role without the requisite expertise. While familial ties provide trust and familiarity, they may not align with the industry and transaction-specific knowledge crucial for effective succession planning. Despite potential cost savings and the comfort of involving relatives, the mismatch in expertise and underlying personal biases can undermine the succession plan’s effectiveness.

Engaging trusted advisors with transaction expertise such as a tax or corporate attorney, CPA, valuation analyst, or financial planner familiar with your business’s intricacies, is a practical investment that can yield long-term benefits for all stakeholders. However, there are pitfalls that can occur if a family member without specific industry and transaction expertise is engaged to lead the succession plan. Below is an outline of the potential complications that may arise during the transition process from relying on a family member lacking specific expertise.

Limited Knowledge of the LBM Industry
Family advisors without experience in the LBM industry may find it challenging to offer guidance on intricate subjects such as supply chain management, lumber inventory, pricing, or regulations. This lack of expertise could lead to subpar advice, and possibly overlooking important trends or opportunities for business growth and innovation, which ultimately drive business marketability and value.

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Insufficient Specific Financial Expertise
Even if a family member excels in another field, they might lack the financial acumen needed to evaluate the business’ financial health or to identify growth opportunities. This deficiency could create a risk to the business’s long-term viability and value, as crucial financial aspects may be overlooked. Keep in mind that a more profitable business is typically a more valuable business.

Strategic Misalignment
Family advisors may prioritize goals that differ from those of the business owner, resulting in resistance to necessary changes. This resistance can obstruct effective succession planning tailored to industry and company specific needs, thus impeding innovation and adaptation. Further, misalignment of strategic objectives can lead to the business owner spending more time and money throughout the succession planning process than if they had hired transition specific advisors.

Conflicts of Interest
Personal biases or family obligations might influence judgment, leading to decisions that are not in the business’s best interests. Disagreements between family advisors, third- party advisors, and the business owner regarding transition plans could escalate into conflicts extending beyond the workplace and affecting family and customer relationships, which can compromise the integrity of the succession plan.

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Lack of Familiarity with Tax Planning Strategies
Inadequate understanding of tax planning strategies can expose the business to unnecessary financial liabilities and hinder wealth preservation and transfer across generations. Even a leading estate attorney will likely not be well versed in the tax implications related to the ownership transition of your business. Ultimately, we need to understand the net, not gross, value of the business and this is impacted by specific decisions such as the structure of the sale (e.g., asset sale, stock sale, or sale to an ESOP or cooperative).

Lacking Expertise in Ownership Transition Strategies
Without an advisor proficient in ownership transition strategies, the family may encounter difficulties in smoothly transferring ownership of the business, risking its continuity and stability. For example, owners can directly grant shares of stock to key employees as part of their incentive and succession planning strategies. However, many high-quality CPAs and attorneys who work with business owners are not familiar with this transition strategy because their expertise is not in selling privately held businesses.

While involving family members as advisors in executing a succession plan for your LBM business may seem convenient due to existing trust and potential cost savings, the lack of industry and ownership transition expertise can pose significant challenges. To ensure a smooth transition and effective succession plan development and implementation, investing in trusted, transition-focused advisors who understand your business’s specific needs and goals is essential. By doing so, you can mitigate potential complications, save valuable time and resources, and preserve important relationships. n

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