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Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.
A recent survey found that less than 43% of family-owned businesses have a succession plan in place. While most business owners would like to see their business remain in the family, less than 30% of family owned businesses will be passed on to the second generation and only 12% will be passed on to the third generation.
First, people do not like to think about change and will procrastinate. Succession planning requires the business owner to confront tough questions such as:
Additionally, many business owners convince themselves that they are too busy to prepare a plan. Others have been making all of the decisions for so long that they are reluctant to delegate responsibility.
Second, demographic changes have significantly impacted succession planning. The number of children per family has declined, and the likelihood that one of their children working in the family business has also declined. In 1900, the average family had 3.5 children, which dropped to 2.2 in 1950, and is now less than 1.8 children per average family. Besides the fact that there are fewer children in today’s family, they are also more highly educated. In 1957, only 10% of people between the age of 25 and 29 had a college degree. Today, that percentage has increased to over 30%.
Third, technology presents a challenge to the viability of many small businesses. Historically, a large portion of small businesses were in retail sales. Today, Amazon and Walmart have eliminated many of those “Mom and Pop” shops. Artificial intelligence may have a similar impact on many service-industry jobs in the near future.
I often hear talk of succession planning and exit strategy as if they are the same thing. However, there are subtle differences between the two.
You may think that exit strategy prepartion is only for business owners approaching retirement age, but this is not the case. Many times, I have heard business owners say that they do not have to plan for retirement because they will simply sell their business to provide a nest egg for retirement.
More often than not, the business does not sell for as much as the owner believes it is worth, leaving a shortfall in retirement funding. Another common occurrence is the early demise of the business owner, leaving their surviving spouse to sell the company. Buyers rarely pay full value for the company in a distressed sale, and then the surviving spouse’s retirement is significantly underfunded.
When it comes to planning your exit, the earlier you get started the better. If you wait until retirement is imminent, your options may be limited.
There are numerous reasons for a business owner to exit his/her business.
Business or professional reasons may include:
In addition to business reasons for having an exit strategy, many people have personal reasons for leaving the business that may include:
Whatever your reasons for developing an exit plan, to be effective you must start early and not wait until you are ready to retire to get the full value for your company. Most consultants believe it takes a minimum of 5 years for an exit plan to be executed properly.
The following are the primary reasons to begin the planning process early:
Most entrepreneurs find exit planning to be a daunting task, so they procrastinate. To make the process go more smoothly and be more effective it is important to have the assistance of outside professionals.
Asking these professionals about weaknesses in your business early on will give you the time to develop a plan to correct these weaknesses and enhance the value of your company.
A good exit plan has several parts that take time to develop.
The primary purpose of your exit plan is not about planning for tragedies, but about seeing that your successful business continues after you leave the company. It is about defining your goals and achieving them.
Ready to start your exit plan? First Bank is here to help you Make Great Things Happen. Read the next article in this series: Defining your goals for the exit plan.
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