By Eric Reich
As a business owner, I think about my business a lot. Actually, that’s an understatement, I think about it constantly. Like many business owners, my business is also my largest asset. Clearly, I’m not alone. In a 2023 PwC family business survey, 78% of business owners said that protecting their business was a top priority. The problem, however, is that only 34% of business owners have documented or communicated their intended succession plan.
I think this is one of the greatest threats to small business owners and one of the main reasons that only 30% of small businesses are ever successfully sold. The remaining ones simply close shop. This is important now more than ever because it is expected that over half (51%) of all baby-boomer-owned businesses will be ready for transition within the next 10 years. As with most business owners, I’ve worked too long and hard to not be able to monetize my company someday.
Some business owners feel like their family will “figure it out” when they’re gone. If they have partners, my response is usually, “Like you’ll figure it out when your partner is gone?”
Not planning for the succession of the business can lead to you having a new partner that you may not want, may not like, or worst of all, you may not even know. This is a real potential concern for the remaining business partners.
Unfortunately, business owners failing to plan for the company’s succession isn’t much different than everyone else failing to do their own estate planning. I can tell you from experience, that failing to plan for either is going to be a disaster in the best of cases. In the case of a business owner, it will almost certainly be much worse.
While there is no best way to plan for the succession of your business, there are things that can help make it easier. Here are a few considerations when planning your succession.
- Who will buy it?
Will it be an internal sale to employees, partners, etc. or will it be to an outside unrelated third party? If it is internal or to an already identified buyer, then you will want to execute a buy-sell agreement. A buy-sell agreement stipulates who can buy your shares and how they can buy them based on what valuation and under what circumstances, etc.
- Valuation
As business owners, we almost always overestimate the value of our businesses. It’s human nature. When what you think it’s worth and what a potential buyer thinks it’s worth don’t match, you may not be able to come to an agreement. I suggest that you go out and get a professional valuation done by either a business appraiser or a certified valuation analyst (CVA). Ask your CPA, as some CPAs are also CVAs.
- Timeline
If you are planning to exit your business, don’t wait until you want out in order to prepare. Planning for your exit can take three to five years if you want to maximize your valuation. Know when you want to exit, how you want to exit, and then exit. Don’t stick around longer than necessary. Let the new owners take over. If you trust them enough to buy it, then trust them enough to run it.
- Plan for the unexpected.
Not all business owners exit their business voluntarily. Death or disability are some of the most common reasons for a change in ownership. Failing to plan for these events is by far the most disastrous situation for a small business. This is why I suggest you try to identify potential buyers before you exit so that you can set up a buy-sell agreement in advance.
If your small business is so important to you that you have dedicated much of your life to it, then taking an appropriate amount of time needed to plan your succession should be a top priority for you. Reach out to your CPA, estate planning attorney, or financial advisor to get the process started right now.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
