Business owners often invest years, even decades, into building their companies, pouring their hearts and souls into their work. As they approach the later stages of their careers, a big question arises: “What comes next?” With over 33 million business owners across the country, many nearing retirement, there’s a wave of business transitions on the horizon. Surprisingly, many Baby Boomers are not fully prepared for the emotional and financial challenges of succession planning.
Here’s what you need to know about the upcoming succession boom and how to prepare for it.
Currently, about 51% of small business owners are over 55, close to the average age for passing along a business, which is around 63. A recent study by Edward Jones highlighted that 64% of business owners have a succession plan, which means a significant 36% are not focusing on this crucial step. Some business owners believe their company isn’t ready for succession planning due to various reasons like concerns about the future of the business, finding the right successor, or simply not knowing where to start.
When thinking about transitioning a business, leaders often wonder, “Why now?” and “What should I prepare to ensure my successor succeeds?” Several factors influence this decision, including:
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Legacy: Consider the legacy you want to leave. Confidence in your successor(s) maintaining or enhancing company values makes passing the baton easier.
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Market: Be aware of when exiting or selling is wise. Selling at the right time can aid retirement planning. Consulting a financial advisor can also clarify your business’s value.
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Mission: Document your company’s mission and vision, including short and long-term goals. Clearly conveying your vision to potential successors helps maintain the business’s integrity.
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Cause: Unplanned events, such as health crises, might require a transition. If your business limits time for personal values like family, it might be time to consider exiting.
Facing the challenges of business transition, size often determines the type of hurdles. Larger companies generally deal with financial and legal issues, whereas smaller businesses focus on finding a successor who can preserve the company’s culture and promote growth. Consulting a financial advisor can assist business owners in navigating these complexities, even if they already have a succession plan in mind.
The emotional aspect of stepping away from a business after significant investment is demanding. Business succession planning often brings emotional challenges, as many owners fear feeling ‘lost’ post-transition. This emotional challenge is intensified when family is involved, as nearly half of appointed successors are family members. Choosing a successor might spark conflicts, so being emotionally transparent can build trust during the transition.
The continuation of a business is crucial, and 41% of business owners worry about smooth operations after they exit. Picking the right successor requires years of careful planning. Among those with a succession plan, about 69% have chosen and are preparing their successor. Early planning and selecting successors who fit well with the business culture can facilitate a smooth transition.
Financial concerns are significant for 38% of business owners facing transition. Properly valuing the business, handling tax issues, and ensuring liquidity for retirement or reinvestment need careful attention and professional advice. Yet, only 37% of business owners currently work with a financial advisor, indicating a need for more comprehensive guidance.
To make the transition smoother, business owners should focus on:
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Early Planning: Many start succession discussions just one to two years before transition, which is often too late. Consider planning years ahead and prepare for unexpected events.
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Set Goals: Clearly define business and personal goals, such as preserving profitability and legacy, to fairly evaluate candidates. Look at leadership skills, business knowledge, and cultural fit.
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Professional Development: Offer training and growth opportunities for successors to prepare them for leadership. Also, seek professional development for yourself by consulting legal and financial experts, researching, and staying updated on market trends.
To effectively handle succession planning, customize strategies to meet the specific challenges and needs of your business. By identifying potential hurdles early, you’ll be more ready for the fast-approaching wave of business successions. For more insights on planning for business succession, explore resources by industry experts.
Zach Gildehaus, a strategist with Edward Jones, offers insights based on his extensive experience in financial services.
