The Case for Small Business Succession Planning: You’re Going to Work Forever?
Did you know that 60% of small businesses do not have a business succession plan in place? This is according to Nationwide’s latest Small Business Survey , which was conducted by Harris Poll. This survey of 502 U.S. business owners with fewer than 300 employees revealed that 47% of owners did not even believe such a plan was necessary! How could this be?
Business trends in this country indicate that older business owners often decide to work until later in life and postpone succession planning until they get close to their intended retirement. Unfortunately, this delay has harmed some businesses’ employees and their families because the businesses are not prepared for unexpected events such as the business owner’s disability or death. Younger business owners appear to have a better grasp on the importance of succession planning. According to the survey, Millennial business owners are the most likely (61 %) to have a business succession plan in place; by comparison, Baby Boomer (32%) and GenX (32%) leaders are much less likely to have such plans.
Among the business owners who have business succession plans in place, less than half have discussed those plans with a lawyer (48 percent) or a financial advisor (40 percent). Of those who have not discussed their succession plans with a lawyer or financial advisor, many (48 percent) do not think it is necessary.
Nationwide suggests otherwise, reporting that business owners spend so much time and energy making their business successful that they need wise counsel. A lawyer or financial advisor can prepare for the business’s transfer , establish its true value and identify how the seller should be paid for his or her interest. “The time to do all of this is not in the middle of a crisis when you have zero leverage.”
A succession plan should be seen as a living document that is regularly reviewed to make sure that it still fits the company’s needs. Just like a personal will, a business succession plan should clearly define the owner’s intentions and should leave nothing to chance. Think about this: Succession planning for your business is just as important as having a will for your family. You wouldn’t put off creating your will, would you?
Fee-only financial advisors and lawyers advise that to achieve good transitions, business owners should have succession plans in place between two and ten years before they are ready to make a change. According to a Securian Financial study, 33 percent of owners plan to sell to a third party; 25 percent expect to simply close up shop for good; 20 percent plan to transfer the company to a family member; and 20 percent plan to sell to a partner or key employee.
After you build a successful company by working for 30 long years, are you just going to close up shop and lock the door?? Run—don’t walk—to your advisor. Working with a qualified advisor can help you with your plan.
Financial advisors who specialize in this area tell us that the most successful business succession plans involve an attorney, an advisor and a CPA from the start. The most important goals are continuing your life’s work and protecting your legacy. Conversations with these specialists should focus on how the purchase of your business will be financed, what the terms of the buyout will be, and how to transition between leaders.
Among other things, your fee-only advisor, CPA and attorney can help you establish a plan that can achieve the following:
- Solidify a market for your business
- Create certainty about the sale price, terms and financing
- Identify events that could trigger succession and potential leaders for after the succession
- Establish retirement income for you
- Provide a sense of security for your surviving family members
- Facilitate a smooth and controlled transition
- Establish funds for the purchase of the business
- Reduce the potential for future litigation
Don’t forget to share your plan with those who will be affected. Who should be the first to know? Decide well in advance how and when you will tell family members, partners, employees, vendors and clients about the plans for transitioning your company’s ownership and leadership. Remember that after all is said and done, your advisor will help you determine the best investment strategy for the assets you receive from your business. You will be in good hands.
