What Business Owners Should Know About Succession Planning

In the United States, baby boomers – those born between 1946 and 1964 – own 51% of all small businesses, according a report by the Exit Planning Institute. In the coming years, those baby boomers will begin thinking seriously about retirement – the Exit Planning Institute found that 77% of baby boomer business owners want to exit their business within the next 10 years.

Unfortunately, many of those business owners don’t have a formal plan in place to step away from their business, according to the report. Only 13% of baby boomers said they had a written personal plan in place, 15% said they had a written company plan, and 35% said they had a written personal financial plan, indicating a mixed level of preparedness.

For business owners of any age, succession and transition planning is key to ensuring you and your business are prepared for the expected (such as retirement) as well as the unexpected (such as death, divorce, business disputes or other unforeseen events), says Meg Martin, VP/senior wealth and fiduciary advisor with Bell Bank Wealth Management in Minneapolis.

“If you don’t prepare, and there’s no plan in place, you’re putting your retirement and your business at risk,” she says.

Here’s what business owners need to know about succession planning.

Work with an Advisor

As you begin to think about stepping away from your business, it’s essential to work with a wealth advisor. Business succession plans can be complex and involve many different parties, such as tax professionals, appraisers to help with business valuation, and attorneys to prepare the necessary documentation, and your advisor can be your resource to help navigate the process and put together your team of experts.

Consider Your Goals

Early on, your advisor will get to know your personal and business situation and work to understand your goals, both for yourself and for your business. Whatever shape your transition plan may take, your advisor will make sure it’s able to meet your personal needs today and in the future.

“Before we can accomplish your business goals, we need to be confident that all of your goals and needs will be met on the personal side,” Martin says.

Areas to consider in this early stage of the process could include:

• What are your goals or plans for retirement?
• How much do you already have saved for retirement, and how much money would you need in order to retire comfortably?
• Have you considered how you would move on from your business? Do you want to sell to an outside party for the highest possible price, or would you prefer to keep the business in your family or with key employees?
• If your goal is to keep the business in your family or with key employees, do you have individuals who are interested in running it? Can they afford to purchase it outright from you, or have you considered options like a promissory note, traditional financing, or an Employee Stock Ownership Plan (ESOP)?

Understand Your Options

Once your advisor has a good understanding of your situation, they’ll help identify potential transition options that meet your goals, which could include a sale, transfer or buyout.

“Sometimes you aren’t even aware of what your options are,” Martin says. “For example, if you’d like to pass your business on to your child but cannot afford to gift it to them, we can look at the possibility of a loan that allows them to buy you out, or other options to help make that happen.”

It’s important for business owners to understand not just the options themselves, but also the related implications of each, such as legal and estate planning questions and impacts on taxes, employees and family dynamics. Your advisor and team of experts will be able to walk you through each of these considerations.

Communication is Key

As the specifics of your plan start to come together, communication with all parties is essential. Whether you plan to sell your business, or pass your business to family or employees, you’ll need to be open and transparent with family, employees and potential successors so that everyone involved with the process understands the timeline and knows what to expect.

Start Preparing Early

Even if you’re not planning to step away from your business for years, it can still be beneficial to engage with a wealth advisor far in advance. Just as you’ve spent years growing your business to where it is today, you want to make sure that you and your business will be prepared when it’s time for the next chapter in your life.

“Business owners pour everything into their business,” Martin says. “It’s their livelihood and their sweat and blood. Passing it on is a really delicate thing, and we want to help ensure it’s done right.”