According to the Small Business Administration, 90 percent of U.S. businesses are family owned and employ 62 percent of the workforce. In addition, small companies fuel roughly 64 percent of the country’s gross domestic product. Then why do only 30 percent of such companies succeed in the second generation and just 15 percent make it to the third?
That is because most small business owners fail to seriously plan a viable business succession strategy. Even if you have no plans to retire, succession planning is needed in the event something happens to you – death, serious illness or disability.
Fail to plan, plan to fail
Over the past 20 years, I have worked with many small business owners who make terrible mistakes when it comes to planning an exit strategy. There can be a number of reasons and a few myths that feed into this issue. But the primary reason is that they rarely look at the business as an asset. And seldom do they ever consider developing an exit strategy for their business.
When small business owners start their companies, their initial intent is to make a paycheck to support themselves and their families. Many business owners rarely think about their business as a salable asset until something happens, such as:
- Owner burn out
- Health-related issues
Sadly, either of these two events usually puts the owner at a disadvantage – the proverbial fire sale. It generally takes years to put a business succession plan in place that will maximize the value of your business.
If I use the analogy of selling a used car that you no longer want, it will drive the point home (no pun intended). If you have a used car and you take the time to clean it, tune it up and make it look good before you try to sell it, odds are you are going to get more money on the sale. With a business it is more complicated but analogous to this example nonetheless.
When should I consider selling my business?
Determining when to sell your business is a difficult undertaking. There are quite a number of considerations that need to be made both on the business and personal side.
One aspect of your business succession plan is to determine whether the sale will net you enough money to live your preferred standard of living over the course of your lifetime. This is assuming you are selling the business for retirement. Here it is important to make sure you understand the effects of taxes on the sale.
Many business owners run retirement planning numbers and assume they are going to net a few million dollars. Unfortunately many realize they grossly underestimated the impact of state and federal taxes.
Also very common are situations where a business owner underestimated the value of the business. Knowing this might have allowed them to retire a few years earlier. They could have sold a few years earlier and sailed off into retirement.
You also need to build into the numbers the cost of selling the business. These cost include a business broker, real estate broker as well as other types of consultants.
This illustrates why it is important to have your finger on the pulse of the value of your business and to give serious consideration to succession planning and not just a periodic passing thought.
Assemble your transition team
When you decide to sell your business or transfer it to family members, you will first need to assemble your transition team and start the process years before you would like to move on. This will give you plenty of time to assemble your team and make the necessary adjustments to the business and to your personal financial situation to make the transfer successful.
Because of the complexities involved, a business owner will need a team of professionals to help assist in the process. Depending on the size of your business and other factors, at a minimum, you will need a:
- Comprehensive financial planner who understands both business and personal finances as the two are inextricably linked for small business owners
- Business attorney
- Valuation expert
- Business broker
- Risk management specialists
There could be the need for others such as a:
- Business consultant
- Marketing professional
- Real estate specialist
- Mergers and acquisition specialist
- Venture capitalist
- Financing specialist
- HR consultant
You might also need a behavioral specialist if you plan on an internal transfer to family members and they don’t play well together in the sand box. As you can see, the situation can be complicated and perhaps for some mind boggling. However the payoff can be and usually is dramatic.
Like anything else in life, the better prepared you are the more likely you are to succeed. And like any aspect of business, the more qualified the people are you put on your team, the greater the likelihood for success. Now is the time to get started looking at your business as an asset to be maximized today and choose your advisory team wisely.
Robert (Bob) Gustafson is a Certified Financial Planner® with over 20 years of experience in the securities industry. Bob spends over 100 hours per year in advanced financial education, studying the many facets of the financial industry, including securities, insurance, taxes and other areas that affect your financial portfolio. Learn more at Triton Financial.