Baby Boomers are retiring at a staggering pace of over 4 million per year. Consequently, this has created a dramatic increase in privately held company transfers to the next generation. Needless to say, this can be a huge undertaking. Many business owners are caught in a challenging situation where they feel stressed and unprepared. There are many legal, operational and strategic aspects of transferring company ownership which require careful thought and planning. Below is a high-level overview of the process including do’s and dont’s for business owners considering a transfer of ownership.
One of the first issues on the business owner’s mind is determining the timing of his or her retirement. As timing is being considered, a fair selling price is calculated. If the price is agreeable to the successor, the process begins to unfold.
The owner then begins to work with his or her CPA to ensure a transfer structure is created that minimizes taxes. He or she also works with an attorney to draw up necessary legal documents. Oftentimes, the transfer continues, and the owner begins to receive payments. As this occurs, a financial planner becomes involved to ensure the money is invested appropriately. Sadly, this process often degrades into issues of payment between the successor and the previous owner. This occurs because the successor was unprepared to successfully lead the company. When this occurs, it becomes difficult for the company to make the appropriate buy-out payments.
History tells us that 60% of businesses run by second-generation leaders fail. The failure rate falls to 90% with third-generation leaders. During transitions, the seller has assumed that his successor knows “how” to run their business. After all, their successor has been in the company for a number of years. Unfortunately, the successor has little experience working in other companies. At the same time, successors often lack formal management training or education. To make matters worse, the successor may not have been thoroughly assessed for knowledge, skills, behaviors and motivations. All in all, this is a recipe for disaster.
Successful transitions should always begin with the identification of the best successor. Once that person has been identified, they should be assessed for knowledge, skills, behavior and motivation. Finally, a thorough development plan should be created and implemented.
No bulletproof plan exists to ensure transitions are successful, but if successors are not strategically prepared, the chance of failure is high. Given that private business owners typically have a large percentage of their personal wealth tied up in their business, it makes tremendous sense to create a development plan for the eventual successor. The quality of the seller’s retirement may depend on this activity more than any other! Early planning is key, so get started today.