I am seeing a lot of succession planning experts in the news, seminars, blogs etc. these days. And rightfully so. As noted in my prior blog, somewhere between 8 and 10 million small U.S. businesses owned by baby-boomers will come to market over the next ten to fifteen years. These statistics suggest a looming and protracted buyer’s market. So getting a fair value for your business will be a challenge, requiring advanced planning and considerable forethought.
But so many business owners fantasize that they will avoid selling, and simply hand the keys over to their sons and daughters. As noted by my good friend David Ryan at DRJ Capital Advisors, relatively few businesses are successfully transitioned to the next generation (less than one in three). Most of the time, the kids don’t have the same passion and desire to run the business. They have their own lives, dreams and ambitions, which don’t likely include your business. And even if they did want to run the business, they don’t likely have the right skills and talents. Don’t force this one.
So what are the alternatives?
An outright sale is not out of the question – it just requires more planning and attention than in the past. Fix the business up with more curb appeal, starting now. If you have holes in the lineup or need some bench strength, hire up. If you have accounting or legal issues, resolve them. Maybe you have been letting the tail wag the dog by focusing too much on avoiding income taxes. Clean that up or it will cost you way more money when you go to sell than the tax money you saved.
How about an ESOP? Pain in the neck with all the compliance you say? Sure, but that’s not sufficient reason to not to do an ESOP. You will get less for your business in an ESOP, but may end up netting more due to favorable tax advantages, especially if you own a C Corporation. The key here is – do you want to transition your business to some loyal, dedicated employees? If so, an ESOP is a great choice.
The right transition of your business depends on the circumstances, so plan wisely. But don’t wait – the more time you have to bring about the right transition, the better your chances of success. If you are like most small business owners, over 80% of your total net worth is tied up in the business. I don’t care how diverse your investment portfolio is, you are not diversified so long as you own the business. Take some off the table. Bring in a partner, sell a portion to a private equity firm, or transition via an ESOP. But get moving…