You probably don’t have a succession plan in place… You’re not alone.
During several of my small business consulting engagements, a surprising trend emerged: despite being close to retirement age and running profitable, legacy businesses in their communities, many owners had not yet formalized a succession plan. This situation isn’t unique to our clients.
According to the National Association of Corporate Directors, 75% of all private businesses lack a formal succession plan. This statistic isn’t necessarily a reflection of a lack of desire or aptitude, but it’s become clear that we need more education, awareness, and resources to help shift the narrative around this critical topic to improve outcomes.
There are 36.2 million small businesses in the US (privately held; <500 employees), driving the heartbeat of America and creating two out of three new jobs annually. In this article, we’ll uncover more about why succession planning is especially crucial now, where the resistance from owners comes from, the ways to sell a business, and the first steps to take in the process.
At its core, the aim of any succession plan – or exit strategy – is to ensure a smooth transfer of leadership, assets, and vision, helping maintain the foundation for the business to continue to grow and ideally, be prosperous long after the owner retires.
Effective leaders often begin preparing their successors well in advance and build this into part of their (still) current role and tenure. Mentoring and coaching become integral to the process, strengthening the relationship between current and future leadership and the likelihood of a successful transition.
Why succession planning is especially crucial now
Succession planning has become noticeably relevant in business news today, as Baby Boomers are starting to age out of the workforce and retire in massive numbers. The phenomenon, known as the “Baby Boomer Tidal Wave” is certainly compelling:
- More than 50% of small businesses are owned by people 55 and older, representing 8 million private businesses. – Lending Tree
- 65-75% of small businesses will be up for sale in the next 5-10 years, marking the largest transfer of privately owned businesses in U.S. history. – Inc. Magazine
- Most small business owners don’t plan their exit strategy until they decide to sell, with 80% having no exit plan the year before they put their business on the market. – International Business Brokers Association
With so many owners aging into their 60s, many are suddenly facing both personal retirement and business succession planning. One often drives the other, creating an urgent call to action to safeguard their family, business, legacy, and assets.
A past client of mine was grateful that we made succession planning a key part of our project. He addressed his retirement and his planned exit from the family business. The relief of aligning his intentions and plans with both his business partners and his family was tremendous.
Why is there resistance to succession planning?
- Owners are often focused mostly on the day-to-day operations.
While owners are aware that there will be a decision to make one day – a time to retire, close, or transfer the business – it doesn’t seem pressing during the daily grind.
As a former small business owner and current business advisor to many, I know firsthand how time-consuming it is to manage people, daily operations, and field emergencies. We’re so deep in the day-to-day that thinking about a business valuation or planning for a potential sale feels overwhelming, if not impossible, or just not relevant enough to attend to today.
- Too many owners, competing agendas.
While exaggerated at times, HBO’s hit series Succession captured the realistic nuances, challenges, and dramas that can arise in family-owned businesses. Those dynamics add additional complexities to an already sensitive topic, and the more owners or interested family parties there are, the more complicated everything becomes.
Roughly 27-30% of all US Small Businesses are family-owned. That’s a lot of family dynamics.
Where do you fall on the succession planning spectrum?
Based on my experience, business owners often fall into three categories as we broach the topic of succession planning and assess the current situation:
- Lack of clarity about the business’s value and vision for the future. They haven’t had the time or taken the time to get their thoughts together, meet with advisors, or put anything on paper. They do not know the true market value of their business.
- Uncertainty about who their successor should be. Even if they have a sense of their business valuation and when their retirement or the transition should happen, they do not have a clear idea who the future owner should be – whether that means a new owner within the company or selling to a third party.
- Lack of knowledge about the entire process. They have clarity on decisions, vision, and timing, but are not exactly sure how to move forward and/or who is needed, from conducting business valuations to executing legal contracts, understanding tax implications and smart tax strategies, and partnering with trusted business advisors to help with the transition and prepare the future leadership team for the change ahead.
All of this can create a cycle of procrastination, often leaving succession planning until a crisis arises. Time and fear are significant factors here; the longer an owner waits, the more daunting and seemingly difficult the process becomes.
Succession planning is a blend of practical steps, complex decisions, and emotional considerations, all of which need to be addressed early and carefully. While some owners love their work too much to even consider stepping away, or may not be financially ready to retire, it’s still important to get organized, understand the options, and lay the groundwork for an exit plan. Many sole proprietors also intend to leave their business to their spouse, who may or may not be prepared to manage or sell it, and would benefit from more guidance as well.
Another important aspect that often gets overlooked is the emotional toll of the decision-making and the impact of the imminent change. For many owners, their business represents decades of hard work, passion, fulfillment, and, in family-run businesses, feelings of pride, legacy, and loyalty.
This roller coaster of emotions became evident with a former client of mine throughout our succession planning process. He was the sole proprietor and owner of a successful business for over 30 years. He was beyond ready to retire. We completed the valuation for the business and drafted paperwork with legal counsel outlining the two-year transition path and equity purchase structure for a senior executive.
She was the right fit, had worked in and managed the business for over a decade, loved the company, and was aligned with the owner on a future vision. However, the owner still had some resistance in finalizing the decision. It took a few more months to complete the process.
Transitions are hard, and emotionally accepting retirement can take time, even if it’s the right thing to do and most of the paperwork is in place. Owners need to realize they are not alone, and everyone goes through these feelings as part of this major life event. BizBuySell addresses this and offers useful advice on navigating the natural emotional stages of the sale process: How to Manage Emotions When Selling a Business.
Ready to Talk About Planning or Selling?
The final piece is to understand the various paths to exit, as well as the likelihood of finding a buyer. The reality is that there are three main exit paths, and according to Inc. Magazine, only 25% to 33% of private companies successfully find a buyer.
The three main exit paths are:
- Pass the business to the next generation (only 17% of businesses are passed down)
- Close or liquidate the business (only 35% remain open within 10 years, 65% have closed)
- Sell to a third party (this can be tricky if the buyer doesn’t align with your values)
Resources like the Small Business Administration, trusted business advisors, and even other business owners in your community are the best options for moving forward with planning for your future.
