Most owners start thinking succession planning when they start thinking retirement.

By Jack Murphy

We’re in a demographic shift that’s not only changing the profile of small business owners today, but has strong implications for the future of the businesses they run. In the U.S., the average age of a small business owner is around 50 years old, and Small Business Administration data indicates more than half of small business owners are 50 to 88 years old. We’re already seeing high demand for acquisition financing, and these demographics suggest this will continue over the next five to ten years. Are business owners prepared with a succession plan that will minimize tax liabilities and maximize retirement assets? Unfortunately, not many are.

Most owners start thinking succession planning when they start thinking retirement. In recent years, surveys on retirement preparedness have shown that Americans are unprepared or underprepared for retirement, and not just young adults. One survey found that 1 in 3 adults have no retirement savings, while another found the median retirement savings was $8,000 among families with head of household aged 50 to 55. If you plan to retire before 70, this leaves a very short window for planning and executing the exit of a business and securing standard of living.

Not only is the profitable sale of the business important to the owner’s financial future, but it also helps protect communities and local economies from rising unemployment. According to the U.S. Small Business Administration, small businesses employ nearly 60 million people, which accounts for just under half of the private workforce. Yes, new businesses will emerge, but ensuring existing companies continue to operate and provide jobs is critical – and arguably one of the best legacies an owner can leave behind.

For many business owners, financial buyers, like private equity firms or banks, and strategic acquirers provide an opportunity to maximize the return on your business – and help it grow in ways a founder-run may not be resourced to achieve. Private equity is going to play a big role in lower middle market activity over the next few years; in fact, several new firms focused on the lower middle market have formed (many with active funds) in the past three to four years. In the lower and core middle market, the private equity industry is sitting on a lot of money as the fundraising environment has enabled firms to raise funds more quickly than in the past and deal flow has been relatively stagnant. Banks have been and will continue to be prominent players in the space as well. Smart owners should get familiar with the sale process to confidently start engaging with these types of buyers or move on to other exit strategies.

Many succession plans will focus instead on selling the business to a familiar group or individual – like family, a management team or employees. Knowing the buyer well doesn’t make it any less of a process to sell though. It may remove some of the obstacles in the upfront discussions, but it requires even greater diligence on ensuring the right estate plans, trusts and ownership structures are in place.

Identifying a buyer is one step in a much larger, time intensive process. Ensuring financing is there for the acquisition is critical to mitigating the risk of investing time and effort to find a buyer, only to have the deal fall through. And, don’t forget the basics – owners can’t lose sight of the day-to-day and overall financial position and operation of the company. Not only is this critical to a successful sale, but many business owners will maintain a stake or a role in the business for some time post-sale before fully transitioning into retirement.

Regardless of the type of buyer, don’t just put some fresh paint on the business to sell it. Get valuations early on to help guide strategic investments to increase or sustain the value in the years leading up to its sale. This will also help owners to better assess the right exit strategy for the business – and ultimately, allow more time for working with a trusted financial partner to set up the right estate, trust and ownership structures to facilitate the sale and minimize tax liabilities.

Some 84 percent of business owners report their current business to be their first and only, meaning all their retirement assets are connected to this business and the successful exit from it. Transitioning the wealth to retirement living is not a small feat, and if not done with careful planning and thoughtful execution, could leave you short of money as you progress in retirement. Prior to the exit, understanding risks for tax liabilities will help ensure you’ve been able to best capture your wealth, and proactively managing your financial life after sale will help you keep the wealth.

The message is clear: preparedness matters and planning is something that owners of any age and in any stage of the business should do proactively. Strategic, long-term financial planning is imperative and can’t wait for tomorrow. Whether a business is just starting or getting close to sale, having an exit strategy will maximize the return, protect your wealth and alleviate the anxiety of playing catch up when it’s time to sell.

Jack Murphy is President of Business Banking at Citizens Bank. The Business Banking group provides tailored advice and solutions to businesses with up to $25 million annual revenue.

Exit stock photo by Constantin Stanciu/Shutterstock