Planning to fail?
When I talk to my clients who own small businesses about what keeps them up at night, many cite concerns about retirement-driven transfer risks. As Baby Boomers and older Gen-Xers age out of the ability and/or desire to continue running their businesses, they face the question of what to do with the businesses they’ve spent their lives building.
PwC’s Global Family Business Survey revealed that 85% of business owners do not have a succession plan in place. This is not a small problem. As of 2023, there were 33,185,550 small businesses in the US, providing about half of private-sector jobs, with locally owned companies circulating three times as much money back into local economies as franchises or absentee-owned businesses. Failing to plan is planning to fail.
Project Equity found in 2018 that people over the age of 55 own over 2.9 million firms, representing roughly half of job-creating businesses, with about 32 million employees and nearly $6.5 trillion in revenue at stake. In 2023, the Exit Planning Institute reported that 58% of businesses are affected by the Silver Tsunami: 19% are owned by Baby Boomers and 39% by Generation X.
This is not just a retirement story. It’s about continuity of services in local communities, employment’s impact on local economies, divergent interests between generations, and the very real challenges of arriving at a business valuation.
Emerging challenges as owners seek exits
The Silver Tsunami is not just about the transfer of wealth but also of knowledge and processes. Who will own the business next? How this question is answered will have ripple effects for years, affecting not only the Founder and their family but also the people whose lives are touched by the company, both as employees and as community members. Further, it can lead to enormous tax consequences, family infighting, and instability that disrupts or destroys the business.
- Operational risk: Fragile systems and tribal knowledge
Most small businesses face the operational risk of lacking transferable systems. There are no documented Standard Operating Procedures, and workflows have not been captured. Much of “how things are done” amounts to tribal knowledge among those who do the work. Further, many customer relationships are personal relationships with the owner. Often, the owner’s personal brand overshadows or drives the brand recognition for the business. As a result, successors often inherit fragile systems that depend on the owner.
- Leadership gap between Founders and Successors
There is a leadership gap between the capabilities of the Founder and those of the potential Successor(s). In leading their businesses, Founders rely heavily on intuition, informal authority, and personal relationships. By contrast, Successors have to rely on systems, data, and structured leadership. It takes deliberate preparation to structure the business for scalability and durability, and optimally, a gradual, phased transition from the Founder to the Successor(s).
- Emotional and cultural risks in transition
Emotional and cultural risks are very real. It has been said that culture eats strategy for breakfast. Indeed, transition failures are often driven by the Founder’s reluctance to relinquish control, concerns over the Founder’s perceived loss of identity, intergenerational conflict, and interpersonal differences that fuel cultural differences. Learn the key that opens the Golden Handcuffs.
- Financial risks and misaligned expectations
Misaligned expectations are often rooted in financial risks. Owners frequently overestimate their business valuation based on what they believe they need in order to retire from the business. When the business is largely built on the relationships driven by the Founder, methodologies developed by the Founder, and/or the ingenuity of the Founder, revenue streams can be owner-dependent.
Many small businesses are unable to elicit desirable purchase offers because their financial statements (specifically, the Balance Sheet and the Profit & Loss) do not clearly present a strong EBITDA (earnings before interest, taxes, depreciation, and amortization), which is often used in business valuation.
What do Successors need from the Founder?
Begin the movement into mature leadership by first shifting your approach from being an Operator of the business to being a systems builder for the business. Think in terms of frameworks that can guide the Successors into how you have experienced success in the business. Successors may revere your problem-solving skills, but what they really need is a decision framework.
Ensure the financial soundness of your legacy by making sure your Successors understand cash flow dynamics, working capital, and profit margin drivers.
Create systems of measurement that provide objective accountability. In doing so, you will transition from informal management to Key Performance Indicator (KPI) dashboards and structured operational cadences, as well as predictable cadences for accounting and finance.
So, what’s a Founder to do?
We explore many details of succession planning in our Succession Strategy article. Consider this as an evolution of your business, not a handoff. First, think about the outcomes you want for yourself, your family, your employees, your business partners, and your community, and then prioritize them.
- Evaluating your succession options
Next, explore the potential options: passing the business down to family members; taking it public or selling it to investors; turning it over to your partner(s), key employees, or customers; or donating it to a qualified non-profit. Each of these choices has inherent strengths and weaknesses, so you need to closely examine how they align with your priorities.
- From Operator to Executive Founder
A business that cannot run without the owner is not transferable. To transition from the Founder-Technician role to the Executive Founder role, you must move from working IN the business to working ON the business. Rather than doing, apply your knowledge to designing a system to transfer your knowledge. Rather than being the essential person, build the team’s capacity to function independently. Many successors know the product, the trade, or the service, but not yet the executive job; it is your duty to them, first, to become that Executive, and then to teach them how to be the Executive.
- Documenting systems and building structure
Begin with the end in mind: you want to create the framework to keep the business on the rails after you depart, so begin by documenting all of the business’s core processes. Create decision rules and customer workflows.
Identify and train internal leaders early to understand the financials, make sound decisions, and be comfortable with accountability for themselves and their direct reports.
- Cleaning up financials and preparing for valuation
Clean up the business financials! Normalize the earnings. If you’ve been comingling funds, be sure to separate your personal expenses. Prepare a 3 to 5-year financial history.
Create a formal Succession Plan that identifies the phases on a timeline, who the Successor(s) will be, and how ownership will transfer.
- Transitioning relationships and reducing dependency
For the customer relationships you have cultivated, introduce your Successors and help them understand what makes each relationship work. Look at ways to diversify customer relationships by building new ones that the Successors can build. Diversify any vendor dependencies to at least 2 or 3 vendors for all critical aspects of the business.
- Institutionalizing knowledge
Transitioning out of the business requires the Founder’s knowledge to be institutionalized into the business and handed off to the Successors. Begin with a list of questions that you would want to know if you were thinking of buying this business, such as, how do you know where to turn for revenues in lower seasons? Where have you found allies and reliable input? What types of customers have proven most loyal and most profitable? Keep a notepad handy to jot down these questions as they come to mind, and each week, spend some time writing down the answers.
A word to prospective successors
You are not inheriting a finished system, but an ongoing entity that is a work in progress, ever evolving in the marketplace. Get a strong grip on the financials, mastering cash flow, profit margins, and cost structures – and not just the Cost of Goods Sold (COGS, or direct/variable costs), but also what it takes to keep the lights on (KTLO, or overhead/indirect/fixed costs).
Watch for efficiency and opportunities to drive more value. Before you launch into making changes, be sure to listen first to those with the tribal knowledge, get to know the business culture, and carefully identify the internal power structures. Once you’ve done this, you should maintain the reputation and relationships that work, and upgrade the processes, controls, and scalability. Remember, sustainable businesses run on processes, metrics, and accountability, not just individual effort!
The decade ahead
The 2030s will test whether the next generation can convert personality-driven businesses into system-driven enterprises, refine intuition into disciplined execution, and lead through sound structures rather than force of will. The Successors who can do this will go beyond inheriting or buying a business; they will multiply its value and build generational wealth.
Sources:
https://advocacy.sba.gov/2023/03/07/frequently-asked-questions-about-small-business-2023/ https://project-equity.org/impact/silver-tsunami/
https://exit-planning-institute.org/2023-national-state-of-owner-readiness
https://blog.exit-planning-institute.org/valuation-to-value-creation-playbook
https://hbr.org/2025/09/the-founders-final-act
https://www.pwc.com/gx/en/services/family-business/family-business-survey.html
https://www.score.org/resource/eguide/small-business-owner%E2%80%99s-guide-succession-planning
