by PIDCphila
June 28, 2019
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Across the United States, about 10,000 baby boomers (individuals born between 1946 and 1964) are retiring every day. Baby boomers own about half of all privately-held businesses in the United States. Forbes also reported that 72% of the millions of baby boomers who will sell or close their businesses over the next decade lack a succession plan. As a generation of privately-held business owners reach an age that the rigors of owning a business subordinate to interests in spending time with families or seeing the world, succession planning becomes a priority for those business owners.
Whether you’re a baby boomer business owner that is beginning to think about retirement, or a business owner that is beginning to plan for retirement, succession planning is vital to the continued success of your business.
What is Succession Planning and Why is It Important?
Succession planning is the process of making legal and financial decisions about the future ownership of a business. Owners initiate this process by identifying a successor, which may include co-owners, heirs of the current owner, and/or outside parties. Without a clear succession plan, disputes may arise about the future ownership and operation of a business. To prevent these disputes (or an interruption of business operations) after a timely or untimely cessation of current ownership, business owners should begin carefully constructing a succession plan and sharing it with those who an owner expects to operate the business in the future.
Things to Consider While Succession Planning
Business owners typically consider selling his or her business or transferring ownership of the business to a third party, such as a child or business partner. If selling your business is an option for succession planning, you may want to consider the following:
Ownership Sale
Prior to marketing a business, business owner should take the following steps to prepare its business for sale and a buyer’s due diligence:
- Put in place a succession plan
- Get a reputable third-party appraisal of your company to understand its current value
- Revisit financial statements, organizational documents, and the capitalization of the business with a lawyer and accountant to prepare for a buyer’s due diligence inquiries
- Review, interview, and select (if desired) a business brokerage to assist with marketing and preparing the business for sale
- Consider implementing strategies to increase revenue and profit margins to take a financially stronger business to market
- Interview and engage an attorney to begin reviewing and understanding your business, as well as to prepare an agreement of sale or other sale document.
These guidelines provide a rough plan for preparing a business to be evaluated by potential buyers and increase the chance of your business being sold within the time frame that you have in mind. According to Forbes, and based on evaluating activity on BizBuySell in 2017, approximately 20% to 30% of businesses that are marketed for sale find a buyer. Although these guidelines will not guarantee that your business is sold, they may better position a business owner for marketing the business and receiving a fair price for it.
A New Generation of Business Buyers: Millennials
Millennials are people born between 1981 and 1999, making them between 20 and 38 in 2019. A generation known for seeking fulfillment within their professions, having an interest in helping the community, advocating for causes that align with their values, and searching for growth and a sense of purpose. Despite these desires, millennials experience the highest rates of unemployment and underemployment, and only 29% report feeling engaged at work.
A survey of millennial perceptions on entrepreneurship found that 66% of millennials have goals to start their own business and 61% believed they could find greater job security by being self-employed. Additionally, millennials are becoming increasingly dissatisfied with the traditional career path which includes college, internships, and climbing the corporate ladder. Accordingly, this group may be receptive to purchasing an existing business, particularly when the business’ current owner is interested in grooming a millennial into a successor.
Millennials are the first generation to enter the workforce already having native fluency in technology and are constantly pushing for societal change. As a result, these potential business owners are comfortable with technological trends, and can keep up with rapid change. These traits can translate to a millennial leveraging technology to propel a business forward, where an existing owner may not consider technology-based strategies.
Selling to Millennials
It is particularly important for a baby boomer looking to retire out of their business ownership to utilize innovative resources and strategies to market his or her business. By integrating and leveraging technological resources, such as BizBuySell and other online business marketplaces, a baby boomer or business owner will improve their chances of selling the business and reaching a millennial audience. A business owner may also use more traditional mediums to attract a buyer, such as a local chamber of commerce, young professional organizations, local investment banks, business brokers, and industry-specific trade shows.
To further attract millennials, a business owner should offer training, mentorship, and consider remaining an employee or advisor of the business for a period after sale or transfer occurs. In addition, an owner should emphasize the social benefits of their business, such as charitable donations and diverse hiring practices. As millennials are increasingly conscious and interested in a business’s effect on surrounding communities, demonstrating societal goodwill can increase interest.
Employee Stock Ownership Plans – An Alternative Method of Transferring Ownership
An Employee Stock Ownership Plan (ESOP) can be an effective way to transition ownership to employees, while offering tax benefits for a company and its existing owner. According to the National Center for Employee Ownership, there are roughly 6,500 ESOPs in existence covering more than 14 million participants as of 2018. This method involves setting up a trust fund and contributing shares of the business to the ESOP. Company contributions to the trust are tax-deductible, and within certain limits and allocations, can be made to employees based on relative pay or some other formula. Further, studies have shown that ESOP companies grow faster after setting up an ESOP than would’ve been expected without it, likely because employees become more invested in the performance of the company as equity owners than they may have been otherwise.
For succession planning, this method provides incremental liquidity for a baby boomer business owner looking for a tax-advantaged exit strategy. Specifically, ESOPs can aid in multi-stage transactions where the owner sells minority interests at different time intervals, and the remainder later. Under this approach, the business can make tax-deductible cash contributions to the ESOP to buy out the owner’s shares. In addition, this method aligns the employee’s interests with the owner’s, as both would stand to benefit from the business succeeding.
Conclusion
Succession planning is important to ensure a smooth transition of ownership and prevent interruptions to business operations. If a baby boomer, or other business owner, does not have heirs or current co-owners interested in purchasing their business, the owner can sell their business to a third party as an alternative means of succession planning. In such a case, a millennial entrepreneur may be an ideal buyer for the company. Alternatively, a business owner may consider transferring ownership to those that have contributed to the success of the business – the employees. Ensuring that the business is effectively advertised to this young demographic, offering a strong mentor-mentee relationship with potential buyers, and utilizing ESOP’s can be effective strategies to incorporate into any succession plan, whether the owner is a baby boomer or not.
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** Special thanks to PIDC’s Tarik Brooks and Efraim Burle for contributing this article.
*** DISCLAIMER: This Article has been prepared and published for informational purposes only and is not offered, nor should it be construed, as legal or accounting advice on any specific facts or circumstances. The contents of this article are intended for general informational purposes only and you are urged to consult an attorney or other professional concerning any particular question that you may have.
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