What is your plan for retirement? If you are like the majority of the other 30 million small business owners in the U.S., your business is the majority of your retirement plan. Whether your plan is to sell the business to a third party or transition ownership to your employees, odds are the majority of the funds you and your family are counting on when you retire are tied up in your business.
Here’s the problem: most small business owners start thinking about succession planning in their 60s, when they are facing retirement. Not only is this too late, but the vast majority of owners fail to consider what will happen if they die or a disability stops them from being able to run their business before retirement. Selling your business in a fire sale is not the best way to ensure financial security for your family.
WHEN TO START THINKING ABOUT SUCCESSION PLANNING?
Succession planning is not only for those over the age of 60. In fact, odds are waiting until you are ready to retire is too late for many options. A recent study by CNBC and the Financial Planning Association found that the only thing harder for small-business owners than emotionally letting go is actually finding a buyer. Only 28 percent of the business owners surveyed were successful in selling their business. According to CNBC, 10 million small-business owners plan to sell or close their businesses over the next 10 years as a means to fund retirement. There won’t be enough buyers to go around.
Let’s look at this from another prospective: compare transitioning your business to negotiating a lease. Let’s say your business has out grown its current space and you are looking to relocate. If you start looking for new space well ahead of your current lease’s expiration date, you are in the driver’s seat. Landlords will be throwing concessions at you (reduced rent, rent abatement, build-out costs, etc.) because they know they have competition and they want to lock you into their space. But what if you had waited until a few months before you have to vacate your current space? Now you’ve lost your leverage. There are only a handful of spaces that can accommodate you on short notice and those landlords know they have you over a barrel. They won’t be making any concession for you – they’ve got you right where they want you.
The same is true for succession planning. Try selling your business when you are facing retirement – the buyer knows you need out, and they will use that against you. The same is true even if you are planning to transfer the business to your current employees. You may have waited too long and that key employee you were counting on gave up and left for another company.
SHOULD YOU CLOSE OR SELL YOUR BUSINESS WHEN YOU RETIRE?
The Wells Fargo/Gallup Small Business Index indicates that a little more than half of all business owners say they are not ready to quit working or sell their business. Roughly the same amount of people stated that they are concerned that they will not have enough money to retire.
It is not easy to make the decision to sell or close a business, especially one that someone has spent a lifetime building. Any Illinois business attorney knows that the process can be complex and emotional. However, business owners should think about their exit strategy well before their targeted retirement date. When a business has substantial assets, selling the company can fund retirement. However, if a business is no longer profitable, closing the doors may be the best option.
SUCCESSION PLANNING – CHOOSING TO SELL
According to the U.S. Small Business Administration, the most important part of selling a business is correctly drafting the sales agreement. The document should include the names of the parties involved as well as the following:
- A list of the assets that will be sold as well as any inventory included
- The purchase price and payment terms
- A covenant not to compete
- Any pertinent background information
Owners who are already thinking about their retirement should plan for flexibility so the sale of the business can take place during a strong market. As an Illinois business attorney would recommend, this can improve the odds of getting the best possible price for the company. Waiting until the last minute to make the sale can lead to a rushed decision, fewer buyers and much less revenue. Investopedia recommends using the funds from the sale of a business to fund a simple IRA, a simplified employee pension IRA or other retirement options.
SUCCESSION PLANNING – CHOOSING TO CLOSE
Some owners may decide that closing a business is the best option. A sole proprietor may do this at any time. However, someone involved in a partnership, corporation or limited liability company will have to consult with other owners to dissolve the business.
The Small Business Administration advises that anyone who is considering closing doors should consult with professionals, including accountants, attorneys and business brokers. Failing to take the right legal measures can result in tax liability. When closing, an owner will have to cancel any licenses and permits that are no longer needed. Even the business’ name registration can be canceled with the local government.
Deciding what to do with a business after retirement is not something that should be taken lightly. Anyone who is weighing their options should consult with an Illinois business attorney.
Succession planning is for all ages, business shapes and sizes. Planning ahead is the best way to ensure financial security for not only you and your family, but your employees who would be out of a job themselves if you were suddenly not there to run the business.
Should you have any questions about succession planning, selling your business or other retirement matters that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law, Collaborative Divorce & Mediation.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.
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