Succession Planning for Small Business Owners

You’ve created a business from scratch. You’ve spent 20 years cultivating relationships, building revenues, streamlining your process, and building a nest egg for retirement. During this time, your primary focus has been on building the business and ensuring success. Your retirement would come as the fruits of that labor, and retirement always seemed far off. But, now you’re starting to see retirement as something tangible, something that might happen soon, and you have no idea what to do. Will you leave the business to a relative? Will you sell it? Do you have a partner to consider? What happens when you step down, and how do you use that to ensure that you can afford retirement?

This is at the heart of succession planning. It is something that most business owners don’t think about, but which should be a consideration very early on in a business. In talking with top management at Premier Factory Safety, they expressed to us that their leadership has been carefully planned for the future. Because while we all hope to make it to retirement in good health, an injury, an illness, or death can leave a business in serious trouble if there is no succession plan in place – and the business which you’ve poured your life into for two decades could disappear overnight.

For many small business owners, the expectation is that one day their children will take over the business. Unfortunately, less than a third of all small businesses make it from one generation to the next. Many children don’t want the business, or they don’t have the acumen in that industry, or there is a difference in opinion on the direction of the company, or there is a struggle between siblings. There are many things which can get in the way of an easy transition to children, and while it might be your dream, you need to find out if it is what your kids want.

If they don’t, then you need to find another successor. This can be a current employee, a competitor, an investment group, or really anyone else with the resources to purchase your company and maintain it. But you need to consider how long you will stay on to advise, how you will be compensated for that time, how you will value your business, and how you will be compensated for that value. Then, you need to consider if there are any partners who get a percentage of that earnings.

Additionally, you need to consider your clients; how are they going to handle the transition? If you sell your business will the clients stay with the new ownership? If not, is there really any value in your company? If you are owner-financing the acquisition, what is the repayment timeframe? Will debt be leveraged against the business to repay you?

As you can see, there is a near-endless number of potential questions. As such, most business owners work with a succession planning attorney to help draft the contract, so there are contingencies for every possible outcome. Without a firm contract that clearly outlines what happens in every possible event, your business can get held up in court for years, and your retirement can be delayed or cut short.

Ultimately, when thinking about succession planning for your small business, it is important to ensure that you either have the liquidity to survive retirement before the sale or transition of your business, or you have guarantees in place to ensure you will receive enough from the acquisition to safeguard your retirement. And if there will be any form of long-term repayment used to purchase the business, be sure your retirement will not be contingent on the new owner’s success at running your company.