Building successful small businesses doesn’t necessarily prepare owners to walk away from something they toiled so hard to create.
But eventually, every owner will leave — whether they plan to or not. As business owners consider their retirements, big questions arise about the future of their companies. How do they ensure that something they spent a lifetime building will survive them? Do they sell? Are the kids interested in taking it over? What about loyal employees? Owners, business brokers, consultants and other experts say the retirement of the founder or the principal of a family business can be a minefield of legal, financial and emotional obstacles that must be addressed before they walk out the door.
Planning effectively for a smooth transition is key to getting the best outcome. And a solid, workable and updated succession plan is essential for any small business to thrive.
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It's hard to leave your business
Many business owners fail to plan for their departure, potentially dooming their companies to chaos and possibly closure.
“You never know when that yellow bus is going to come and hit you,” says Michael Berlin, who sold his stake in his IT consulting business to his partner after they disagreed about the business and after he was hospitalized for months with a health issue that nearly killed him. “You never know when you're going to have a forced succession,” Berlin adds. “I was lucky; I came within probably a half day of having a permanent, forced succession.”
“Historically, there’s been a low success rate of privately-held company transitions — an indication that business owners are ill-prepared for their eventual exit,” warned Scott Snider, co-owner of the Exit Planning Institute, an Ohio-based company that certifies exit planning advisers, in testimony before a U.S. Senate committee last year.
Why don’t some prepare?
Snider, whose company also educates business owners, explains: “As owners, we are trained to grow a successful company — one with great employees and customers… meaningful products and services.... and a strong balance sheet and profit.
“But when we go to transition our companies, we are slapped in the face with a harsh and unexpected reality: Though we may be successful, we did not build anything of significance. All our intellectual capital is locked within us.”
Why do many business owners fail to plan succession? “I think a lot of people don't do it because of the darkness that comes with it because it's almost like planning for your own death,” says Patrick Flood, a former Green Beret who created Owners in Honor, a nonprofit that helps veterans buy businesses.
Pittsburgh attorney Patricia E. Farrell says many owners fail to plan for succession because they’re busy; it’s a chore they’ll get to later.
Farrell says she has had clients in their early 60s who don’t plan for succession because they’re not ready to leave. “I say I understand you're not ready to go yet, but this is a five- to seven-year plan. When you're 70, are you going to be ready to go? You can't start talking about that when you're 69.”
Flood adds, ”If you really care about your business and you really care about the value created, the people that are working for you, the customers that you're serving and the suppliers that are helping you, then you have to start considering your succession plan from day one.“
The great transfer
With more than 80% of small businesses owned by Baby Boomers and Generation Xers, it’s not surprising that 73% of the nation’s business owners report wanting to exit their companies within the next 10 years — more than 50% are seeking an out within five years.
This represents an estimated $14 trillion business wealth transfer over the next decade, according to The State of Owner Readiness Report from the Exit Planning Institute.
The implications are substantial for the economy. According to the U.S. Chamber of Commerce, the 33.2 million small businesses in the United States represent 99.9% of all businesses. And 45.9% of the workforce or 61.6 million Americans is employed by a small business.
Ernst & Young reports that the average family business owner begins to think about succession at age 63.
Snider says 60% of business owners don’t understand their exit options, while 80% do not have a formal exit strategy and 50% of owners have no plan at all. “Worse yet,” he adds, “70% of the companies put on the market do not sell… and 50% of the exits will be involuntary due to external elements that force a business owner to sell or close.”
Failing to plan
Experts say business owners should create and continually update a succession plan as part of the operation of their company as early as possible.
“As a small business owner, if you lack a succession plan, you might be faced with your only option being to close your business and walk away from this firm that you've built, not only with no legacy, but also with no residual financial payoff,” says Professor James Vardaman of the Fogelman College of Business & Economics at the University of Memphis.
Take what happened to a Pennsylvania grocery store owned by three sisters. Snider says one of the sisters approached him at an event in tears. She was trying to figure out what to do next in her life. One of her sisters died shortly after being diagnosed with cancer. “She’d been the visionary and heartbeat of the company,” Snider says. Two months after she died, the remaining sisters had to liquidate, selling the inventory and paying off loans.
It’s not uncommon, Farrell says, for business owners to die unexpectedly with “no contingency plans at all for what happens now. Sometimes it's as bad as they employ 300 people and nobody else can do the payroll.”
Not having a plan can make it harder to get good employees who are committed to staying because, Farrell says, “those people perceive that there's no game plan.”
These owners, she says, are “risking the stability of income for all those people who work for them. They're risking undervaluing the company if it has to be sold. You don't want to be selling a company when it's in a state of chaos because you didn't have a game plan together. That's not the ideal scenario for a sale where you're going to get the best and highest value for it.”
Says Snider: “It's just not about us. It's about what we really created… And so for business just to disintegrate and close, I just think we, as business owners, are better than that.”
What’s in a plan?
Succession plans vary according to owner and business needs. “There is no one size fits all,” Vardaman says.
Generally, a succession plan starts with identifying goals. Are you solely concerned with the selling price? Or do you prioritize non-financial values over a higher selling price? What about employees and customers? Do you want to preserve the workplace culture? A reputation in the community?
Other steps include:
- Determining the value of the company without your involvement. If some customers are loyal only to you, for example, you can’t include their continued business in the expected revenue.
- Creating and organizing documentation of what the business needs to operate so someone else can step in.
- Assembling a team of consultants, such as a lawyer, an accountant, possibly a broker, who align with your goals.
- Identifying a successor.
When you do plan
For Karen Kyman, adhering to her values was her top priority in 2020 when she sold Precision Communications, the business she created in 1993 with her then-husband in Oklahoma, which services broadcast towers.
She and her husband divorced, but remained business partners. After he died from cancer, running the business became more stressful, Kyman says, and she began to explore her options.
She worried about field workers who were getting older and she wanted to ensure they’d be taken care of if their knees or backs gave out. “I finally decided that the best thing I could do was to find the right type of buyers that carried our same core values and would continue with the legacy.”
“My personal core values that bled over to the business core values are God first, family and work,” she says.
Kyman enlisted a broker and passed up potential buyers she thought wouldn’t align with her values. Many, she says, were flippers simply looking for an investment.
After telling the broker not to bring her buyers who didn’t align with her goals, she ultimately found PromiseONE, a Cleveland-based business co-owned by Scot Lowry, a board member of Promise Partners, a non-profit that helps people buy small businesses. Kyman was impressed by the team and worked out an agreement to sell her business and remain connected by staying at the helm for three years and then joining the board.
“I still look back and I think it just has to be God's blessings, how he brought us together,” she says. “I can still say today, after selling the business in March of 2020, that everything I went through was so worth it because…they have done everything that I imagined, plus more, and are providing those opportunities now for some of those workers that can't get on towers. And not only that, I still get to remain a part of the business as a board member and still do consulting with them and as they might need me.”
She says she received a fair price for the company and additional payments when the company met financial goals after the sale. She goes to annual company meetings and dinners and stays in touch with employees.
Had she gone with a higher bidder who didn’t align with her values, she says she could have gotten almost double the price. But the added payments after the sale ended up making the deal more lucrative.
“I'm so glad I didn't waiver from what I felt was the right thing to do in my heart.”
Finding the next owner
Many business owners want to pass their companies to family members, but that is not always an option. Younger family members may want to strike out on their own and not be monitored by older relatives. Sometimes, family members aren’t qualified to assume the helm.
An employee or group of employees may be qualified to buy and run the business with financing or a company stock ownership plan. Competitors might want to purchase. And a business could be sold to a venture capital firm or find a buyer through a website such as BizBuySell.com, BizQuest.com or LoopNet.com.
Vardaman cautions, however, that selling a business on the open market may not be the most effective option. ”You're posting an ad for something that's going to potentially be millions of dollars,” he says. “The efficiency of that market is just not that strong.”
Then there are qualified buyers interested in entrepreneurship through acquisition, also known as buying a business instead of starting one from scratch. You may be able to find an MBA graduate through a local business school or a retiring executive who wants to buy a business.
Helping buyers and owners
There are organizations that vet and coach budding entrepreneurs, as well as help them arrange financing, mentoring them along the way.
Two examples of these organizations are Promise Partners, an Ohio-based program linked to Case Western Reserve University, and Owners in Honor, a relatively new national non-profit that trains, vets and mentors qualified military veterans who want to own businesses.
Lowry is on the board of Promise Partners, an acquisition entrepreneurship incubator that has helped over 65 people become first-time owners. Most of the new owners, he says, have some business background; many have run businesses; some have MBAs. Promise Partners helps them identify business buying opportunities and build a relationship with a seller, mentoring them past the sale to help them succeed.
“We want to help small business owners know that there is another option,” Lowry says. “There are acquisition entrepreneurs out there that are very capable who believe our mantra: your legacy is our legacy. And we really stand behind that.”
Flood, who started Owners in Honor, says the organization makes sure the veteran purchasers qualify for a Small Business Administration-backed loan and will support the veteran for two to three years after the purchase.
(More) Money isn’t everything
Like Kyman, many business owners aren’t solely fixated on the highest selling price. Reid Tileston, who teaches at Brigham Young and Case Western Reserve universities, has surveyed former business owners in the upper tier of wealth.
He found that those who sold their businesses for a higher than expected amount were “blinded by the price” and were ultimately less satisfied than those whose transition met other goals. These owners would, Tileston says, “get shocked by the amount of money they were offered,” causing them to overlook other issues that they would later regret, such as the treatment of employees.
“I didn't realize how quickly this new company could destroy the culture which I had built,” Tileston quoted a former owner as saying.
Another regret these former owners have is failing to fully consider their post-business lives. “Business owners can get this idea that, ‘Cool, after I sell the business I'm going to go play golf, I'm going to go travel the world,’” says Tileston, who also wrote a book about buying businesses, “Grit it Done.”
Tileston says sellers think, “‘If I have all this money I can do whatever I want; I'm going to be happy.’ But when the actual sale happens, it leads to a sense of emptiness because you don't find the same level of fulfillment in doing those things” as the business provided.
Tileston says some satisfied sellers were able to continue involvement in their companies for at least a year after the sale. One seller told the buyer, “I want to come by once every two weeks on Tuesday and I want to get lunch like I usually do with the team members.”
Others take on a more formal role, such as remaining as chairman. This can have a financial benefit to the seller if a sales contract, for example, provides an additional payout if the company meets specified goals.
One way of ensuring a satisfying sale is to enlist an effective intermediary, such as a broker or an investment banker, who encourages sellers to stick to their principles, rather than just pushing for a higher price, Tileston says.
The ideal outcome, Tileston says, is more likely when sellers, clear on their values, align themselves with intermediaries who are onboard and encourage them to adhere to them.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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