7 Things Baby Boomers Should Consider During Succession Planning
The next few years will see many baby boomers either hand down their businesses to the next generation or sell them outright. Whether you want to transfer your business to your relatives or sell it, you need an exit plan to make a successful transition.
A survey by the Business Enterprise Institute found that about three-quarters of North American business owners have never exited a business before or even attempted to do so.
Taking time to create an exit plan is critical to minimize business risk and the costs associated with transferring your business. Here are a few things you can do to transition successfully:
1. Prepare for Life After Exit
Most business owners are emotionally attached to their work and their business, which makes it hard for them to let go. They see their organizations as central to who they are. Because of this, many can’t imagine what life would be like after they stop working. It leads many to put off retirement by continuing to work at their current job or re-entering the workforce after a brief attempt at retired life.
Boomers still constitute the majority of small business owners in America. They are industrious and many still want to continue to contribute through work of some type during retirement. While relaxing and traveling after retirement makes sense for some, many take up past hobbies, volunteer for worthy causes, mentor other business owners or even run another business to pass the time.
It’s important to start planning for life after exit as early as possible because it will help you get a clearer picture of what you want in retirement. Don’t procrastinate until circumstances force you to; now is the best time to start planning for the next phase of your life.
2. Create a Succession Plan
Many owners have yet to put a succession plan into place. Without formalizing your succession plan, your family may not be protected should anything happen to you before the transition. This is especially true if most of your holdings are in the business.
Owners should consider the roles that key employees and family members will play after exit, ensuring that the Owner’s responsibilities have been delegated to the right people with the authority to make decisions. This reduces owner dependency and frees up the Boomer’s time to focus on maximizing the value of their business.
One area that is often overlooked is how to operate the business in the near short-term in the event the owner passes or becomes incapacitated. Things like user IDs and passwords to the Owner’s devices, login instructions to key desktop and online software, location of all keys for the business, contact information for key advisors, bank and credit card account information, and more.
Not having a succession plan can create a real problem if your family depends mostly on the income from the business to fund their living expenses or if the business can’t run without you at the helm.
3. Put Your Finances in Order
It’s important to have a financial plan in place before you exit. Are you in sound financial shape? How much income will be sufficient for you to maintain your lifestyle in retirement? Will your investment proceeds and savings be enough to meet your future financial goals? Tackle any credit or financial issues you have now before heading into retirement.
4. Have a Tax Strategy
Formalizing your succession plan can help mitigate the impact of taxes when you transfer the business. It can also protect against loss of wealth due to high taxes.
Employing a tax-advantaged strategy like a buy-sell arrangement can protect against income loss and make the transfer of assets uneventful. You can also look into the benefits of setting up different types of trusts and entity structures that can help reduce your tax burden.
You can also benefit from a tax strategy if you intend to give away large chunks of your wealth or business to charity.
5. Invest in the Growth and Development of Your Company
To improve the value of your business, you must have a growth strategy. While every business is different, your growth strategy should include boosting your profits (not just revenues), having a diverse customer base, educating and training your employees, creating incentive-based compensation programs, improving and documenting your processes, and investing in brand awareness.
It can be daunting to take on all these tasks at once. The best way to go about this is to make a priority list, then tackle each item on the list one at a time. Focus on it for a while, say 60 days, then move on to the next item and so on, until you reach your goal. Do this for a year or two, and you will start to see a significant increase in revenues and profits.
6. Time Your Exit
The time is ripe for most boomers to exit their businesses. By timing your exit, you can devote every ounce of energy into shaping your legacy and improving the value of your business. Developing and following a timeline will also help prepare you for the transition and provide you with enough time to mentor your successor.
It’s quite common for owners to want to try and sell or transition in less than a year. Unfortunately, that often leads to closing instead of selling. Giving yourself less than a year to transition is not ideal because you’re more likely to make an impulsive move if you don’t have the time to handle the intricacies of the process.
Owners also find that preparing to exit in advance improves their chances of a successful business exit. The last thing a boomer wants to do is feel like they left money on the table after selling their business, so taking the time to invest in their business now has the effect of maximizing their value when they do exit.
Most business owners need at least 2-to-4 years to plan for a successful exit. As a boomer, now is the best time to start planning for your exit. With so many boomers retiring now and more every successive year, any delays in your succession plans can impact your ability to sell in a saturated market. While it’s a sellers market now, the balance will shift as more and more businesses go on the market to transition, and those owners who invested in succession planning and value maximization will stand out and attract potential buyers.
7. Hire an Advisor
Creating and managing a succession plan is no easy task. It’s not uncommon for business owners to want to do it all, but when it comes to planning an exit, it’s advisable to enlist a professional to oversee the process.
In fact, because a succession plan involves preparing legal documents, hiring an advisor is a crucial part of a succession planning strategy. By enlisting the services of a certified advisor or professional brokerage firm like Raincatcher, you will have peace of mind knowing that someone is dedicated to your cause and keeping you on track toward your goals. If you want to learn more take a complimentary assessment that will provide you with your personal readiness to exit score.