Baby boomers are now turning 65 at the rate of 8,000 every day, according to AARP. Many business owners are among this horde of baby boomers nearing or reaching what has traditionally been considered the retirement age in the United States. Although some are choosing to work beyond age 65, others are turning in their keys.
For most business owners, including you, retiring means selling the company or passing it on to family members. The key to doing this successfully is implementing a succession plan well in advance of retirement.
Launching the process
Ideally, succession planning should start at least three to five years before you plan to exit the business. It takes time for a good succession plan to evolve, and starting the planning process early will help ensure that your options remain open.
Begin the succession planning process by answering some key questions:
- Will you sell your business to an outside buyer, transfer it to employees or managers, or keep it in the family?
- If you plan to sell to an outside buyer, will you focus on the large public buyer groups, a private buyer or a private equity firm?
- If you plan to transfer ownership to insiders, will you use an employee stock ownership plan or management buyout?
- If you plan to keep ownership in the family, have you identified the next generation of leadership and started preparing them for this responsibility?
The answers to these questions will drive much of your succession planning strategy. For example, if you plan to transfer ownership to employees or managers or keep it in the family, you’ll need to identify the next generation of leaders and begin grooming them for this responsibility. It’s never really too early to start this process. In addition to teaching them all the ins and outs of running the business, take the time to introduce them to key vendors, customers and advisors.
If you want to keep ownership of your company in the family, your strategy also will likely address estate planning issues and ensuring an efficient and tax-advantaged transfer of the business to family members.
M&A activity is strong
If you’d like to sell to an outside buyer, your succession strategy probably will have a different focus. The good news for owners looking to sell in the near future is merger and acquisition (M&A) activity is growing strongly.
If you plan to sell to an outside buyer, you should focus on increasing the value of your business in order to sell it at the highest price. Most buyers today are looking for businesses with a track record of profitability, strong cash flow and growth potential. They want to know that your business will be able to generate enough cash and profits to recoup their initial investment and earn a minimum return on investment within a reasonable period of time — usually two to four years.
Good economic conditions
The Blue Sky Report states that not only is now a good time for owners of high-performing companies to sell their businesses, but that “economic conditions indicate that good times will continue for the foreseeable future.” This makes it imperative to start your succession planning efforts soon, especially if you plan to retire within the next three to five years.