Owning and operating a small business encompasses nearly all of an entrepreneur’s time and attention; however, the necessity of managing day-to-day operations often creates as a casualty any mindfulness of long-term planning, especially how to exit and transition the business in order to have a more secure retirement.
Business owners can never plan for retirement too early, but the closer they get to retirement, the more need there is to consider what sort of cash flow the business can provide into retirement. Owners that have poured their entire livelihood into a business typically would like more to show for their effort than a monthly Social Security check and a 401(k) account or IRA. Therefore, proactively creating a business succession plan allows business owners to reach the most beneficial onset of their retirement.
The first thing that small business owners should consider is when they would like to retire and how active they want to be in the business up to retirement. For instance, do they expect to stay in the business to help with transition after they no longer own the company?
Additional matters to consider are how much can be drawn from a qualified retirement account as well as annual Social Security proceeds at various ages. Having a retirement date in mind provides a set timeframe for making these important decisions.
Small business owners typically have three options when it comes to exiting from their companies. The first is simply to close the doors and enter retirement. This is not an ideal choice from a monetary standpoint, but for sole proprietors in personal service fields, such as consulting, it may be the most realistic route. It also becomes the default route for owners who failed to plan appropriately and then are ready to retire without any willing buyers for their business.
The more attractive options are to sell the business to someone either inside the company or to an unrelated party. Should the former choice be the preferred course, planning is imperative. Telling a high-level manager that they have an opportunity to buy the company without adequate time to consider the offer could lead to undesired outcomes. The manager may reject the opportunity because he or she was unaware that it was a possibility and had different plans, or that particular manager may not be the best person to carry on the business.
The earlier conversations begin between a current owner and an employee who has the capability to run the business one day, the easier the transition will be. The grooming process of bringing a highly-talented employee into a position where he or she is ready to own and operate the company can take many years because the employee needs to enjoy steadily-increasing responsibility, receive an opportunity to make management decisions, and develop close relationships with key suppliers and customers.
Selling to an outside party may require less long-term planning, but a business owner should have a good idea of the value of the company and the prospects of selling it. Businesses that have low barriers to entry may be harder to sell because a competitor could start the business alone without having to pay for an already-existing enterprise.
When identifying the value of a company, many CPA firms and other professional service organizations offer valuation services. The valuation will allow an owner to know how much he or she can expect to receive in the sale of the company. It will also shed light on any areas where there can be benefit generated by making changes to operations.
Once all of these decisions have been made and steps begun, the process of exiting a business will be much simpler and stress-free.