You turned your dream into a career and your small business is still going strong as you start thinking about retirement. As a small business owner, succession planning is important to ensure you have a smooth transition to retirement or to a second career. It is a little like going to the dentist - many people do not enjoy it but it saves you a lot of trouble down the road.
There are three main options for a business transition: internal succession, business buyout/merger, or selling off assets and closing. Carefully consider your goals for your business. Do you imagine your business name still meaning something far in the future? Would you like to provide job security for your employees after you retire? Do you envision yourself never fully retiring?
Consulting with a succession planning consultant can help you answer these questions and start your road map. Having a good accountant and attorney will help you with the nitty gritty. And a good wealth manager, like American Money Management, can help you imagine and plan for your life after work.
Internal Succession
This can be a very rewarding type of transition plan and it is also often the hardest. An internal succession plan can take years to implement which is why identifying your transition goals well before retirement is so important.
If you already have someone at the company identified to take over, one big step is taken care of. If not, imagine what qualities your successor should have. Would you like someone who has specific work experience? Should this person work their way up the ranks of your company? What are your must-haves and what is on your wish list?
When you identify someone (or someones), have a frank conversation with them about expectations and concerns. Continuing this open communication channel can prevent many of the common hiccups in this kind of transition. Plan regular check-ins and set goals to help progress towards transition.
Agreeing on a price with a potential successor is another potential obstacle. Hiring an outside professional for a business valuation may help you and your successors come to an agreement on price. The financial structuring of internal succession can take many forms and often is a gradual transition of ownership and management responsibility over time.
Business Buyout or Merger
A buyout or merger with a similar company can be a faster transition to retirement than internal succession but comes with a significant loss of control. Vetting a potential partner and negotiating the details of a merger or buyout can take months or even years, especially when you want to ensure a smooth transition for your clients and/or employees.
The financial part of the buyout may be done with a lump sum but is also commonly stretched over a few years or longer. Some buyouts make future payments contingent on client retention or continued profitability. Others allow you to retain some ownership stake with the financial benefits that come.
Close & Sell Assets
The simplest form of this type of transition is winding down the business and selling assets. This can sometimes be the only option for businesses that rely entirely on the founder’s personality or unique skills to run the business, like a doctor or other professional.
The business’s assets may not be entirely tangible items. A book of business for a client-based business is often a substantial asset. Name recognition, a web address, and goodwill can also all be assets that may be valuable to others.
Formally closing the business will require you to file documents with your state, cancel your Employer Identification Number (EIN), and file your final tax returns. Follow federal, state, and local regulations regarding business closure and records retention.
Choosing the Right Path for You
Deciding on the right kind of business transition depends on your goals with the transition, your market sector, and your timeline. Planning for a business transition well in advance of your expected departure gives you the best chance of success. Setting aside time regularly - once a year in the planning stages and then more often once a successor has been identified - will help you stay on track.