A recent survey found that 72% of all small businesses do not have a succession plan in place!
This means there are lots of business owners with no plan as to who will run their business when they retire or become incapable of running it themselves.
You are probably thinking, “I am a business owner, and I never plan to retire!”
That is a popular mindset among our entrepreneurial clients. Yet, from what we have seen, sometime in your late 50s or early 60s, a bolt of lightning will strike you and you will realize you are not going to work forever in the business you spent 20 or 30 years building.
This insight usually comes in the form of your spouse bugging you to retire or, unfortunately, a medical condition.
When the inevitable happens, what do you do? How do you cash out from the business you spent so many years building? What happens to your blood, sweat, and tears? Will your business just die out? And how do you create your dream retirement?
The first thing you need to do is sit down with your spouse to write out your goals. Focus on two main questions.
- What do you want your retirement to look like?
- What will happen to your business if you retire?
Typically, the most common answer to Question 2 is “I will have to sell it to accomplish Question 1!”
Hire a Financial Advisor
After you have set your goals, the next step is to make them a reality. You can do this by hiring a financial advisor who specializes in working with small business owners looking to exit their business.
A good financial advisor will help craft your goals into something that can be accomplished. They will also look out for your best interest throughout the business exit process.
Before you hire a financial advisor, make sure they are a fee-only fiduciary, as this will help ensure that the advice they give you is in your best interest.
The advisor should also be able to connect you with the professionals who can make your business sale a reality. For example, most advisors will have connections with business brokers, private equity firms, valuation experts, accountants, and lawyers—all of whom will likely play a role in making your goal a reality.
Planning the Exit—Options for Selling Your Business
There are a few primary options for selling your business, but they basically break down into an internal vs. external sale. In an internal sale, the business will be sold to people who work there. In an external transaction, your company will be sold to an outside party.
Family members: If you have a family member who works in your business, grooming them to take over is a viable option. This option makes a lot of sense for owners who want to retain family control and may not want to exit entirely. Because you are selling to a family member, there are attractive tax and legal maneuvers that can be done.
Employees: Another option is to sell to your current employees. This option may make sense if you have a younger workforce. Oftentimes, one or two key young employees are groomed to take over management roles. You would sell shares in your company to them.
ESOP: Some owners will take employee ownership a step further and set up an employee stock ownership plan (ESOP). This is when you sell your shares to most of the employees in your company. As the owner, you can get tremendous tax benefits by doing this. Your employees could also benefit from the upside of the company. These plans are complex and require more discussion than this article has room for. Just know that the ESOP option exists, and it may make sense to explore it.
Private equity: The most common type of external sale is going to be to a private equity firm. Private equity (PE) is a pool of capital (money) that buys businesses, puts lipstick on them, and typically resells them anywhere from three to 10 years later.
Over the last 10 years, private equity firms that “roll up” small business have become extremely popular. An example of this would be a PE company that purchases eye care businesses from optometrists with the goal of creating economies of scale through a larger eye care company.
Selling to a PE firm can be ideal for owners who want to completely exit their business and hopefully get a fair price and cash in return.
Competitor: Finally, most small business owners probably have a competitor in their area who would love to buy out their business, which would allow them to expand their own. This option can be a great one if you know competitors in the area really well.
You should explore all of the above options before making your decision.
Turning the Sale of Your Business into Your Dream Retirement
Once your business is finally sold, you will most likely be left with a lump sum of cash or a stream of large cash payments that have a defined end point. You will work closely with your financial advisor, accountant, and lawyer to make sure everything is handled from a tax and legal standpoint.
Once it is, it will be the financial advisor’s job to help turn the proceeds from your business into the retirement of your dreams.
An advisor will first help you decide how much income you need to support your desired retirement lifestyle. The planner will analyze your Social Security benefits, rental income, pension income, and any retirement savings accounts you may have to determine your income sources. From there, the advisor will make a recommendation on how to turn the proceeds of your business sale into a retirement cash flow.
Some typical examples would be investing in income-generating real estate, creating a portfolio of stocks and bonds built for capital preservation and income, and finally, looking into insurance-based solutions like income annuities.
As you can see, transitioning from a working business owner to a retired business owner is complex, and each decision you make can have a positive or negative impact on your retirement. It makes sense to start the planning 10 to 15 years before you actually plan to retire from your business. If you try to do it a year or two before, you will rush your decisions and could end up making a costly mistake.
If you are a small business owner, what is your plan? Have you thought about how you would retire from your business?