According to MassMutual survey from last year, 40% of small business owners will retire in the next 10 years and not even half of them have a succession plan; the rate of those with plans dwindles the farther from anticipated retirement date. For many of these business owners, the defacto succession plan is a will. This lack of planning is particularly crippling for family businesses, 70% of which never make it to the second generation and 90% go out of business before the third.
Of course, a carefully crafted succession plan will not guarantee you a legacy, but will dramatically increase the odds that the business you built will continue after you step aside. CPA and business consultant Robert O'Hara, who specializes in exit planning, offers these 8 tips to help your company maintain a strong foundation for successful exit planning:
- Increase business value by designing incentive plans for your management team that reward long-term employment and provide short-term incentives to increase your bottom line. Get your key employees on the same page as you and have them help you build business value.
- This may be the perfect time to acquire smaller, less adaptable, less capitalized, or less well-managed competitors. Certainly, this is a buyer's market and there are ways to help minimize your financial exposure.
- The time to preserve the value of your most important asset -- your company -- is now. Look at how you can minimize tax exposure and how to protect your company from unexpected risks, for example, the departure of a key employee. Look at ways to protect your trade secrets, customer lists, vendor relationships, and referral sources.
- If you are planning to sell your business to a third party, there may not be many more peaks in the mergers and acquisition marketplace before you reach your desired retirement age. So it is beneficial to plan for how you will have your business positioned and ready for sale when the economy rebounds. Just like any stock, you want to sell your business when it is growing and on the upside of the growth curve.
- If you have planned an ownership transfer to your children, look at the timetable. Assuming your children are nearing the appropriate age and experience, now may be the perfect time to begin that transfer. With a reduced business value due to current economic conditions, it may be financially easier for you to transfer the company to your children and achieve your objectives.
- If transferring your company to your employees is your preferred exit route, this may be the optimal time to begin that transfer. With a potentially lower business value, if you decide to bonus your key employees stock of the company, you can do so with minimal effect on cash flow and a lower tax impact on your key employees. You can bonus stock, retain control, and simultaneously motivate key employees to stay with the company.
- Make sure your contingency plan is up-to-date. This is the perfect time to review what plans you have in place to insure the business can succeed without you if the unexpected was to happen.
- Prepare a comprehensive personal financial plan, evaluate the current state of your personal affairs, and determine what you need to do to secure your personal financial future. Don't stand impassively on the sidelines during a time of economic volatility. Unlike the "average" investor, you are not limited to the single strategy of pulling dwindling assets out of the market. Even if the general economy suffers, your business profitability need not. Look at your alternatives and get to work.
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