Succession Secrets

A succession plan protects the value of your business.

By David Tobenkin

Three years ago, when he turned 66, Lubinsky, CRS, says his wife reminded him of his vow. He responded by selling his Columbus, Ohio-based business to his son, John, for a five-figure sum payable under a 10-year payment plan, and an agreement for Lubinsky to stay associated with the business as a commercial sales agent. Lubinsky says the arrangement allowed him to profit from the continuing value of his business while helping to ease the way for his son by setting him up in a profitable venture.

Preparing and executing successful succession plans like Lubinsky’s has allowed many REALTORS^® to pass on their businesses in a manner that enabled them to reap financial benefits from their labors and stay active in a less demanding role.

A succession plan is at its heart something every REALTOR^® and agent is familiar with: a transaction between a willing buyer and a seller to convey property, in this case a business, at an agreed-upon price, says Jeffrey Grieff, a Seattle-based attorney, who has assisted REALTORS^® and other professionals with succession plans. On the other hand, some REALTORS^® and consultants note that such transactions often come intertwined with other non-financial goals, including a desire to see the enterprise they created continue after they leave and to help family, employees and clients.

The Time Frame

A first step in planning a succession is examining the goals for the succession and whether they are realistic. That often begins with working with a financial planner to determine how much an owner needs from their business to satisfy their financials needs or goals, says Scott Yoder, vice president at New York City-based investment bank MidCap Advisors, which provides succession and exit planning advice to middle-market companies. In addition, it is critical that professionals have a realistic value expectation about how much money a succession transaction may bring, Yoder says, noting that paying off existing debts and taxes can take out a large bite from the proceeds.

Generally, the longer the time frame for the succession planning, the better, experts say. A longer time period allows time to plump up the business to sell at the best price, to groom and test employees or affiliated contractors to take over the business, and to allow timing flexibility to avoid having to execute such a plan in the depth of a real estate trough, when the odds of success may be greatly reduced.

For many sole proprietors and small partnerships or brokerage companies, a better price often can be realized by selling the practice to employees or family members. Ann Buchanan, CRS, a Hendersonville, Tennessee-based REALTOR^®, has told her team and family that she plans to retire in 2020. Buchanan says she assumed that a longstanding listing agent affiliated with her was her logical successor. But when approached, the listing agent expressed no interest in assuming the business. Now Buchanan is grooming a younger buying agent who joined the team a year ago, but admits that the jury is still out.

Sometimes merging with another practice may be a viable alternative. In January, Deborah Arends, CRS, based in Seattle, executed a merger of her business with the independent business of her husband and his business associate after Arends’ long-time administrative employee and assumed possible successor left to pursue another interest. The transaction, which Arends says required $12,000 in accounting and legal advice and trademark fees, established Arends, her husband and his associate as equal partners and allots them revenues based upon three factors: sales commissions, management fees and a share of overall profits. The arrangement allowed Arends to cut her time commitment to her business in half since last spring, she says.

Creating Value

Beyond realistic goals and examining likely buyers, accurately valuing the business being sold is a critical element of success. Generally, the larger and more successful the practice, the more likely it will be salable, taking the pressure off the reputation of the departing agent to make the sale worthwhile. Among the assets that can create value for buyers are real estate, accounts receivables, business forms and systems, computer software, client lists and databases.

One measure, which Lubinsky says he used to help determine the price at which he conveyed his practice to his son, is to determine the percentage of new business that typically derives from his database or contacts. Other valuation formulas include a valuation based upon commissions, such as valuing the business at 2.7 times the amount of commissions, and valuations based on multiples of net profits or gross receipts, Grieff says.

A variety of professionals can help with succession planning, including attorneys, certified public accountants, financial planners and succession planning consultants. There is considerable overlap among these different classes of professionals in providing succession-related services, so it is important to ask what services they do and do not provide and the professional’s qualifications to provide them. Such services include the following:

• Personal financial planning
• Business valuations
• Introductions to potential buyers
• Estimations of transaction tax implications
• Business accounting for the successor organization
• Drafting of transaction documents such as a definitive agreement that describes the transaction and non-compete clauses or agreements for employees and the seller.

Yoder notes that sole practitioners may only need limited input from such professionals given the smaller profile and cash potential for their transaction plans.

David Tobenkin is a freelance writer in the Washington area.