Preparing for Retirement? Here's Your Five-Year Plan for Separating from Your Business
In the United States, Baby Boomer entrepreneurs are approaching retirement, and a well-planned business succession is crucial for a smooth transition. Here are the key steps to create a successful business succession plan.
Start Early Conversations
Begin discussing succession plans well before retirement is imminent. Ideally, initiate these conversations when the next generation is young, to ensure they see the business as a viable and exciting opportunity.
Define the Vision and Sale Strategy (Around Five Years Prior)
Set a high-level plan that includes deciding whether the business will be sold internally (to family or employees) or externally. This stage is essential for shaping the future direction of the business.
Customize the Succession Structure
Use legal tools such as trusts, family limited partnerships, or limited liability companies to define control, ownership, and asset distribution. This is particularly important when multiple family members are involved, as it helps avoid conflicts while maintaining control with active family members.
Create Roles and Opportunities for the Next Generation
Develop a transition that allows successors to work themselves into the business gradually, ensuring they feel part of the legacy, not burdened by it.
Get Professional Help
Work with professionals like tax attorneys, financial advisors, or succession planning experts who can guide the legal and financial structuring of your business succession plan.
Be Flexible and Adaptable
Succession plans should accommodate changes in business conditions, family situations, and market environments.
Consider Business Value and Exit Strategies
Attend events or seek resources for understanding selling your business, connecting with potential buyers and investors, and preparing emotionally for post-exit life.
Cover Key Operational and Personnel Considerations
Evaluate key employees, market risks, and your own role in the business to ensure continuity and resilience after transition.
Baby Boomers own approximately half of the private businesses in the United States, and the concept of a "wealth gap" is important when considering a business sale - it is the difference between what a business owner has and what they need to retire comfortably.
Selling a business requires packaging it as a product, which includes pitch decks, possibly video, and a story to be sold to prospective buyers. Business owners typically need to engage a financial planner two years before selling their business to help find necessary contacts.
The ideal timeline for a business sale, if selling to retire, is five years. However, external events such as the Four D's (death, disability, divorce, and disagreements) could force a business owner to sell their business earlier.
External sales can come from strategic or financial buyers, IPOs, or other external entities. Selling a business may not result in immediate retirement, as there is often a transition plan and possibly an earnout period.
A succession plan should be considered, especially for business owners planning to retire. Financial planning software can help find the wealth gap, and a free version of the software used by the author is available online. It is essential to remember that a business should not be the only retirement plan for business owners.
For business owners, estate and exit planning should join forces to ensure a smooth transition. The bidding process, letters of intent, and negotiation are important parts of the business sale process and require the right firm to handle. Buyers typically examine at least three years of financials before a sale, and inconsistencies between what was promised and what the books show can cause deals to fall apart.
This article serves as a guide for business owners to get started with the business sale process.
- In the world of DeFi (decentralized finance) and personal-finance, Baby Boomer entrepreneurs can leverage their wealth-management strategies to create liquidity for their businesses, ensuring a smooth transition during business succession.
- For entrepreneurs planning business succession, it's crucial to consider external sales from strategic or financial buyers, IPOs, or other entities, which may provide sufficient liquidity to manage personal-finance and finance-related issues post-retirement.
- In the realm of wealth-management and business, successful entrepreneurs should combine estate and exit planning to optimize their liquidity, allowing for a seamless transition between their business and personal finances during retirement.
