Preparing for a Leisurely Life? Here's Your Five-Year Plan for Business Departure
For Baby Boomer business owners, planning for the sale of their companies is a critical step towards ensuring financial independence and a comfortable retirement. This process, however, can be complex and stressful, involving several key steps and the help of professional advisors.
Determining Succession Type
The first step in a business succession plan is determining whether to pursue an internal or external sale.
- Internal Succession: This option involves passing the business to family members or existing employees. To make this transition smooth, a clear training and transition plan should be developed to ensure the successors have the necessary skills and desire to manage the business effectively. Open and honest communication about the future vision and family roles is essential to avoid misunderstandings.
- External Sale: Preparing a business for marketability to outside buyers requires optimizing operations, cleaning up finances, and making the business as turnkey as possible. This approach is often necessary when there are no suitable internal candidates or when the owner needs a larger sum to retire comfortably.
Financial Planning
Clean, well-organized financial records are essential for any potential buyer. Financial planning involves reviewing at least three years of profit and loss statements, balance sheets, tax returns, and other relevant financial documents during due diligence. Implementing tax-saving strategies can also help minimize estate taxes, ensuring a smoother sale under favourable conditions.
Preparation Timeline
A successful business sale requires careful planning and preparation. Ideally, the process should begin at least 3-5 years before the intended exit. This allows ample time to clean up the books, build an advisory team, and engage a business broker or M&A adviser.
Engaging a Business Broker or M&A Adviser
Brokers can simplify the sale process, handling negotiations and assisting with marketing and closing the deal. However, they charge commissions, which can cut into the sale profits. Selling without a broker requires more direct effort and strong marketing skills.
When selecting a broker or adviser, look for credentials such as CPCU (Chartered Property Casualty Underwriter), CRM (Certified Risk Manager), CIC (Certified Insurance Counselor), or other relevant certifications indicating professionalism and expertise.
Communication and Planning Adaptation
Keep the plan flexible, and communicate openly with family and key stakeholders about business vision and succession realities. Address concerns proactively, including potential family issues like divorce or lack of interest. Recognize that many baby boomer owners find succession planning overwhelming; utilizing professional guidance helps bridge knowledge gaps and ensures better valuation and successful transitions.
In summary, a successful baby boomer business succession plan balances deliberate evaluation of internal vs external sale options, rigorous financial preparation, early engagement of expert advisers, and clear communication with family and stakeholders. Financial planners can be a good starting point for finding the necessary professionals for a business sale, as they often have relationships with relevant parties. The sale of a business is not usually completed on the same day as the payment; there is often a transition plan and possibly an earnout period. Buyers will typically examine at least three years of financials during due diligence. Gaps between what was promised and what the books show are common reasons for deals falling apart.
This article was written by a contributing adviser, not the Kiplinger editorial staff. The financial plan of a business owner will largely dictate which exit strategy makes the most sense. Internal sales are often driven by altruism, while external sales are often a function of necessity. The ideal timeline for a business sale is five years out.
- For effective planning in personal-finance, business owners might consider seeking advice from financial planners, who can guide them in finding the appropriate professionals for a business sale and help them adopt the best exit strategy.
- In the realm of Decentralized Finance (DeFi), proper liquidity management is essential, especially when planning for the sale of a business, as it plays a crucial role in making the operations more turnkey and desirable to potential buyers.
