By Jared Perkoski
One-half of all businesses are owned by Baby Boomers, according to the U.S. Census Bureau. This means that the owners are between the ages of 53 and 71. The Census Bureau also states that the average age of retirement in the United States is 63 years old. This means that half of all business owners are at the average age of retirement or less than a decade away from it. If you find yourself in this category, are you actively planning an exit strategy?
Successful business owners spend decades building their business, but many only spend a minimal amount of time planning for transitioning the company at the end of their careers. I’d be willing to bet that most businesses owners have some sort of life insurance. The main purpose of life insurance is to ensure that your family is taken care of in the unfortunate event that something tragic should happen to the insured. Perpetuation or succession planning is very much a similar idea. It’s not only planning for the inevitable retirement of a business owner but also for unforeseen events. If a business owner were to pass away unexpectedly, the business could have to close in a short period of time if proper planning had not been done beforehand. This could result in the potential loss of hundreds of thousands or even millions of dollars in future earnings for the owner’s family.
Depending on what type of business you have and how it’s structured will determine options that are available when planning an exit strategy and how your company will operate in your absence. The four main types of exit paths are partner, family, employees or an outside firm. Each has pros and cons.
Partners. If you have a business partner or partners, selling your shares to them is the likely option. All owners should have a common understanding of just how much the business is worth. An updated buy/sell agreement should also be in place. This is a written agreement that would trigger if an owner passes away unexpectedly. It is important that this document be updated yearly since a company’s valuation could increase or decrease significantly over time.
Family. Many small and medium-sized businesses have multiple family members involved. If the owner has sons or daughters in the company, typically he or she will transfer the company to them and work out a payment plan over the course of many years or until they inherit it. This is usually the preferred option. The drawback is that the owner does not receive a large lump sum like he would with other options. It should also be noted that the person or persons taking over the company should begin training for this role years in advance. Lack of such training could have serious consequences, such as lost clients or suppliers that could negatively impact the buyer and seller financially.
Employees. If an owner does not have partners or family in the business they may opt to sell to one or multiple employees. This is an option for owners with longstanding employees. Typically, there will be a similar payment plan as with the family member buyout. The advantage to this strategy is that usually those buying the company are high ranking and have had many years of experience. Therefore, the transition would be much smoother than the transfer to a potentially less experienced family member.
Outsider. The last option would be to sell to an outside person or company. This is the preferred method for many business owners who are in the later stages of life, because this typically involves a lump sum buyout rather than payments over time. The owner will not have to be concerned with the future profitability of the company. One major drawback is the negation of that buyout. Many times, the owner values his company much higher than an outsider would. Another issue is dealing with assets and employees. The person or company buying your business may just want the name and the contracts you hold. They may be unwilling to take on current employees or assets such as equipment and property. This can become quite stressful for a business owner as negotiations can last for months.
Whatever a business owner’s exit strategy, it’s important to begin planning now. You are never too young to start this process. If you have family in the business, start training them now in different areas so they can become well rounded and understand the inner workings. If you don’t have family, start identifying key employees and provide similar training to them. Lastly, start having conversations with friendly competitors. You may find someone who is looking to expand and could be a great fit to purchase your company in the future, or they could offer friendly advice or a firm they have used to help them plan.
Jump start solutions
- If you have business partners, make sure a buy-sell agreement is in place.
- If selling or gifting to family, make sure they are well-trained to keep the business going.
- Start planning now and reevaluate the succession plan frequently.
Jared Perkoski is a risk advisor for FB Insure. Contact him at 508-695-1441 or email