Business Owner’s Retirement Planning
Business succession planning by small private companies is much like most individual’s efforts with retirement planning – woefully inadequate. According to the Bureau of Labor Statistics, there are 30 million small businesses in the United States collectively worth over $10 trillion. 60% of small business owners are Baby Boomers set to retire in the next 10 to 15 years. Yet only 1 in 8 of these businesses (12.5%) has a business succession plan. Because of that, only 15% of businesses survive to the second generation and only 5% survive to the third generation.
What happens when a business does not prepare for succession? The following occur with regularity: (1) businesses cease operations, (2) families lose their entire investment, (3) employees lose jobs, and (4) communities lose their tax base. Small businesses employ 53% of all workers in this country. Shuttered small businesses have a significant impact on the economy.
With planning, however, it doesn’t have to be this way.
Owners should plan for business succession as early as age 50 (maybe even earlier). Such planning can ensure the continuation of operations while also ensuring asset liquidity for the owner upon retirement. A thoughtful business succession plan will consider each of the following:
(1) Ownership transfer,
(2) Management succession, and
(3) Legacy planning.
Ownership transfer can occur in many ways. Partners should prepare with a buy-sell agreement. Owners with family in the business should consider whether to gift or sell the business to a family member. Other options include a management buyout, implementation of an employee stock ownership plan (ESOP), or through a third-party sale. Of the many options, an ESOP offers significant tax incentives and employee incentives that the others do not. See more about an ESOP here.
Management succession is a bit more difficult. Small closely held businesses are often built on the image of its founder. It is important to identify a successor whose image can complement and further build the brand of the business. Management succession is rarely completed without a series of fits and starts. The earlier the start, the better the chance of identifying successor management that can continue to grow the business.
Finally, complete business succession planning should consider the needs of the owner upon retirement and address the needs of a spouse and children who may not take part in the business.
A little preparation can ensure that the owner has sufficient asset liquidity upon retirement and that the business will carry on for future generations. Contact any member of the ESOP Plus® team to discuss each of these issues and develop a written business succession plan.