7 Feb 2013
By Tannette Johnson-Elie
It’s one of the most important decisions a small business owner will face – when and how to retire from a business, otherwise known as a succession plan. Yet many entrepreneurs neglect to plan their exit.
Few of us like to think about retiring or our own mortality and entrepreneurs are no exception. After you’ve nurtured and built a business from the ground up, it’s hard to imagine it continuing without you.
Moreover, many entrepreneurs often are so focused on the day-to-day operations of their companies they consequently put off succession planning.
Some are unwilling to put a succession plan in place because they either don’t have family members or key employees interested in taking over the business, while others think they can wait to sell the business when they’re ready to retire without realizing they need to have their businesses well positioned and ready for sale ahead of time.
Nevertheless, experts warn that putting a succession plan in place takes far longer than many business owners anticipate; you need five to seven years to properly execute an exit strategy.
“Exit plans often take years rather than months to work effectively,” says Brian Anderson, editor-in-chief of Life Insurance Selling magazine. “Once a plan is in place, the successor needs plenty of lead time before being ready (financially and from a business expertise perspective) to take over the company. Business owners need to be planning years in advance of the date they anticipate exiting the business.”
Even so, the majority of family businesses have no succession plan in place, research shows. About 70 percent of family businesses have no succession plan in place and less than one in three maintain operations into the second generation, according to a study by Northeastern University’s Center for Family Businesses.
The obvious reason, according to Anderson and many other experts – lack of a well-thought-out business succession plan.
“Most of these people with no plan in place know they need a plan, but they generally don’t initiate the process on their own,” said Anderson, who has edited magazines in the financial services sector for the past 15 years. “As a small business owner, ask yourself, ‘What would happen to my business if I die or become disabled?’ Without a plan, it usually means your business goes out of business.”
What steps can you take to ensure smooth succession of your business and improve your chances of a worry-free retirement? Here are some tips to help you hand over your company gracefully:
Guy Baker, a California-based advisor and wealth manager for business owners, encourages entrepreneurs to develop a “What If?” plan that covers all of contingencies the owner might face if that person were to divorce, remarry, become disabled, go bankrupt or die.
“I call this the 10% solution,” says Baker, managing director of Wealth Team Solutions LLC, Orange County, Calif., which manages portfolios for individuals, retirement plans, 401ks, trusts and foundations. “Too often, even if they (small business owners) had the foresight to put into place a “What if?” plan, it is poorly conceived. So the financial advisor can look at these agreements and find ways to add value.”
Consult with a team of advisors, including a seasoned financial planner, a CPA (certified public accountant), an attorney and a banker who can work as a team on your exit plan.
“Frequently, the financial advisor is a prime candidate to quarterback the team and keep the process moving along,” Anderson said.
Identify all potential successors, including family members, test them in different roles and (discreetly) evaluate their maturity, commitment, and business acumen and leadership abilities.
“Once you have identified a preferred candidate, one way to approach them is to begin with a mentoring relationship and teach the person the intricacies of your business,” Anderson said. “If that progresses well, you can let them know you are interested in eventually transitioning the business to them.”
If a partner or family member is not a realistic choice to take over the business, then look to a key employee. “Even if you believe the person is in no financial position to buy the business from you, there are ways to equitably finance such a transition with the guidance of your advisors,” Anderson said.
If you don’t have key employee to take over the business, consider hiring someone with the right qualities to become your successor and groom that person over a couple of years with the transition in mind, Anderson said. The final option, he says, would be selling to an outside person or company.
The bottom line is that transitioning from a business takes time and preparation. There are a variety of issues that must be considered, which is why it requires education and adequate planning to ensure the handing over of your business is seamlessly executed.