Recent studies show that two-thirds of the current American business market is owned by Baby Boomers who are set to transition over the next decade. Further studies show that only 20 to 30 percent of businesses that go to market actually sell, leaving the majority of business owners without many options to harvest their wealth and transition of their business to the next generation.
Consequently, many soon-to-be retirees who have run successful companies for many years end up staying in their business much longer than anticipated. Additionally, they likely net far less than they could have had they sold or properly transitioned the business. These scenarios present a challenge for the retiring Boomer since the vast preponderance of their net worth (and retirement nest egg) is likely wrapped up in the value of their business.
Therefore, it is paramount for owners to begin thinking about their eventual exit plan well in advance, thereby providing ample time to address and plan for critical planning components. Examples include strategies toward value maximization and tax minimization, choosing the right incentive plan(s) that will properly motivate, retain and reward key talent, restructuring the balance sheet and delegating responsibility over to key management.
Just the same, many business owners have secondary value-based goals they wish to fulfill such as making sure long-time employees are taken care of or that their business legacy or community involvement remains intact. Moreover, proper exit planning must also consider the owner’s estate planning wishing since the continuity of their business will unquestionably leave an impact on their estate.
Understanding and articulating these planning components is equivalent to drafting the blueprint of a new home and then executing the construction based on the chosen design. Ultimately, your exit plan is as unique as you are. By taking proper time to work through this plan, you maintain control and stay in front of the exit process.
Just the same, your exit plan must also provide the flexibility and adaptability you need if plans were to change (i.e. having a “Plan B”). As an example, if you found yourself midway through a successful internal transfer to a key employee/new owner but they then suddenly backed out, or if a third party came along offering you top dollar for your business — a well-designed exit plan will be able to adapt.
For Boomers considering retirement, these components should be carefully considered today and then systematically integrated into a comprehensive, tailored plan of action. If you wish to look at an insider transfer (key employees and/or children) it is recommended to begin the process a minimum of six to eight years in advance. If your intent is to sell to a financial or strategic buyer, you should start planning at least two to three years in advance.
Intentionally planning for these components today helps pave the way for a successful exit tomorrow, which in turn affords you greater options, and perhaps the greatest gift to yourself and your family – peace of mind.
Brenton Saba is the director of business services at Apollon, a Charleston based wealth management and business consulting firm with branch offices in Charlotte, North Carolina; Augusta, Georgia; and Aiken, South Carolina. Brent can be reached by email at email@example.com or by phone at 843-277-3495