More than 50 percent of all small-business owners are 50 or older, according to the U.S. Small Business Administration. That means many of America’s 28 million small-business owners are coming to that point in their lives when they need to think about a transition for their businesses. A survey done in early 2015 by CNBC and the Financial Planning Association found that while 78 percent of small-business owners intend to sell their businesses to fund their retirements, fewer than 30 percent have a written succession plan. That’s not a recipe for success. A good plan covers both the human-resources aspects of a transition and the financial details, particularly if your succession plan is supposed to generate the money you will live on during retirement. It’s also a good idea to have a succession plan if you intend to sell your business to change careers.
Here are some points to keep in mind when you sit down with your lawyer and accountant to draft your succession plan.
Your succession plan could envision keeping your business within the family, which likely already knows your business and brand. Their knowledge could ensure continuity despite a change in leadership. But be sure to carefully check with family members before you designate a family successor to make sure they have the same desire and passion for the business as you do. Many small-business owners assume their kids want to take over their companies, when in fact their children have very different dreams and desires. If one child wants to stay in the business but the others don’t, you may need to have a discussion about how the equity in the business will be divided. If your children don’t want to own or lead the business, you might then want to see if one of your employees does. You can consider selling the business to that employee as part of your succession plan, or retaining family ownership while allowing this employee to run the business. Remember that the Ford family, which still controls 40 percent of the voting power in Ford Motor, hasn’t always offered a family member the CEO position.
On the money side of things, if you’ve been in business a long time, chances are you have substantial equity in the business, which will need to be reflected in the sales price. That may mean instead of an outright sale, you structure the transition as a gradual sale or a lease. Either option can provide you with an income stream and lessen the financial burden on the new owner. There are loan programs that can help a qualified buyer to finance the purchase of a business over as many as 10 years. But other forms of finance might also be needed, for example, to purchase the building in which the business operates, upgrade its equipment or maintain a line of credit during the transition. It can take some time to put these financial tools in place, although the availability of financing through alternative companies is streamlining that process considerably.
Here at McDonald Law Group we know what it takes to secure and protect your investment concerns when involved in a business. Please call the office to schedule a free consultation. This article was provided for informational purposes only and does not constitute legal advice or establish an attorney-client relationship.