Most business owners lack exit plans as wealth transfer looms

Private companies form the backbone of the American economy, yet many owners approach their eventual departure without a clear strategy. On Oct. 15, Peapack Private hosted a conference in Garden City to address this gap, gathering business owners, attorneys, and accountants to discuss the mechanics of exiting a company.

The event focused on the dual nature of business transitions, which involve both complex financial structures and deep personal adjustments. Douglas L. Kennedy, CEO of Peapack Private Bank & Trust, introduced the audience to the firm's 106-year history. He noted that the bank expanded into Manhattan more than two years ago and opened a Long Island branch one year prior. Andrew F. Corrado, president of Peapack Private in New York, then moderated the subsequent panel discussion.

Panelists emphasized that a business is often an owner's largest financial asset, but it also represents decades of personal effort and community ties. John Babcock, president of Peapack Private Wealth Management, described the company as an owner's baby, noting that the decision to leave is as much psychological as it is financial. The emotional weight of the decision can complicate what might otherwise be a straightforward financial calculation.

The scale of the upcoming economic shift is substantial. Robert Melle, a senior managing director, stated that privately held businesses account for 99.9% of all U.S. companies and employ nearly 46% of the national workforce. Approximately $5 trillion in business value is expected to change hands within the next decade. Despite this magnitude, Melle reported that only 54% of business owners currently maintain a succession plan.

Melle warned that transitions often occur involuntarily due to what he termed the five D's: divorce, death, disability, distress, and disagreements. Without a contingency plan, a business becomes vulnerable if its owner becomes incapacitated. He argued that planning does not lock an owner into a specific exit date but rather provides control over the timing and circumstances of the transition.

Financial preparation alone does not ensure a smooth retirement. Becky Wuest Creavin, a senior managing director, cited studies indicating that 75% of owners regret selling their companies one year after the transaction. This regret often stems from a lack of personal planning for life after work. To address this, the panel introduced a framework called STEP, which encourages owners to consider spiritual fulfillment, time management, experiences, and people when designing their post-business lives.

Wealth transfer strategies require careful navigation to preserve family control while managing tax implications. Raymond Radigan, a senior managing director, discussed the use of lifetime gifts and trusts. He cited the example of a farming couple who transferred 60 acres to their children over eight years. This gradual approach allowed the family to utilize gift-tax planning opportunities while keeping property appreciation outside the parents' estate.

Valuation accuracy is critical before any sale or transfer begins. Matthew Luczyk, a senior vice president of investment banking, noted that many owners proceed without a formal valuation. He described a couple in their 70s who discovered their business was worth less than they expected after a quality-of-earnings review, delaying their retirement by two years. In another case, an owner accepted an offer for half the company's true value because he had not sought an independent assessment.

Luczyk advised owners to prepare financial statements and evaluate management teams before engaging with buyers. He outlined various exit paths, including third-party sales, employee stock ownership plans, and family transfers. Each option carries distinct tax and operational consequences. He urged owners to assemble an advisory team of legal, tax, and insurance professionals well in advance of any imminent transaction.

The panel concluded by urging owners to begin these conversations early. Anthony Core, an attorney and president of Jamaica Ash & Rubbish Removal Company, attended the event for continuing education. He stated that staying current on legal and economic changes is vital for navigating the complexities of business succession.