As baby boomers find themselves approaching retirement, the question begs to be asked: What happens to the businesses they own and operate? Various studies suggest that as many as two-thirds of all small and midsize businesses are owned by boomers who plan to exit their companies in the next few years. Yet few are prepared with a written succession or exit plan. While retirement is typically the impetus for a business owner’s exit, other unforeseen events or circumstances—such as an illness or an accident—could precipitate an untimely departure. In every instance, business owners want to ensure operational continuity for the business, plan for their families’ and their own continuing welfare, minimize taxes, and contain risk. Three important steps can help accomplish those goals.
A succession plan should be a part of every business plan, especially if the owner is 50 years or older. If that hasn’t happened, then a plan should be in place no fewer than three to five years before a planned exit from the business. Begin by considering a series of questions about future needs and desires, including:
- When do you want to exit?
- To whom do you want to transfer the business?
- How much money will you need to exit?
- How much is your business really worth?
- If the business is not currently worth enough, do you have a strategy to increase the value of your business between now and your target exit date?
- Do you know how to structure a sale or transfer to a family member or key employees to ensure success, while minimizing your risks and income taxes?
- Do you have contingency plans in place to enable your business to continue and provide for your family if you are unable to do so yourself?
Once you know the answers to those questions—or at least to most of them—you’re well on your way to planning a successful exit. If you’re having trouble coming up with the answers, however, you could find yourself making a hasty exit, without being able to protect or benefit from your years of dedication.
Consult an Adviser
The tried-and-true techniques that brought you business success—such as learning from mistakes, developing a strategy based on experience, and simple trial and error—do not apply when developing an exit strategy. You’ll sell or transfer your business only once, so it’s important to make the most of the opportunity. That’s why you should consider consulting an adviser who has experience helping others with business succession planning. Experienced advisers draw on what they have seen and learned while observing the failures and successes of other business owners in similar situations. An experienced adviser can help a business owner develop a plan that makes the most of the transition and helps minimize risks.
Put It in Writing
As with any other business plan or objective, a succession plan should be put in writing, to ensure that it is carried out as desired and to allow for fine-tuning of the plan as the future unfolds. The plan should include specific recommendations for the sale or transfer of the business, such as the desired buyer or eventual owner of the business, as well as the desired structure of the transaction(s) needed to get there. It is wise to ensure that your exit plan includes a checklist that provides a step-by-step plan of action to assist with implementation and monitoring. To keep your plan on course, the checklist should detail each action that must be taken, the individual or entity responsible, and a due date for the action item.
Owning and operating a business requires a significant investment of time and energy. Protect your investment, and yourself, by taking the necessary steps to optimize your exit and leave the business—and its continuation—on your terms.
Contributed by Bill Manne