According to the United State Census Bureau’s 2022 Annual Business Survey, over half of the business owners in the United States are 55 years of age or older. In Ohio, this percentage is even higher, with 56.2% of businesses being owned by a resident 55 years of age or older. However, the Exit Planning Institute found that only 30% of “Baby Boomers” have a “formal written contingency plan that addresses the 5Ds (Death, Distress, Divorce, Disability, Disagreement).” Taken together, these statistics paint a worrying picture for the near future of mergers and acquisitions: a large ownership transition is imminent, and most businesses are ill-prepared for it.
Why succession planning gets delayed
Business owners may delay succession planning for a variety of reasons, including emotional, practical, or financial reasons. For many business owners, the idea of giving up control of a business they built from the ground-up can feel incredibly daunting. However, a well-planned exit is the best way for a business owner to ensure the future success of the business, protecting the business from ownership disputes or the risk of being dismantled and sold off following the current owner’s incapacity or death.
The earlier a business owner begins planning their exit, the more options the business owner will have on what this plan will look like, including:
- Identifying a family member to take over
- Promoting key employees to owners
- Employee stock ownership plans
- Merging with another company
- Selling the business to an external person or company
Most Americans retire between the ages of 60-65, so in the next ten years it is likely that more than half of the businesses in the United States are going to be undergoing a transition of ownership. This may lead to a large imbalance between sellers and buyers on the market, thereby decreasing the value an owner can hope to receive for its business in the event of a sale.
How to start the succession planning process
So, how can a business owner begin the succession planning process?
- Get a formal valuation. Seek out an external professional to determine the business’s market worth.
- Determine your top priority in succession planning. Decide whether the top goal is ensuring the business stays within the family, maintaining profitability, or maximizing profit from the sale.
- Build a transition plan. Identify the target successor, key employees that will aid in the transition, and qualified financial and legal advisors to guide the owner and company through the transition phase.
It is best to engage with knowledgeable professionals early to ensure that the books and records of the company are up to the acceptable standards and that the structure of the succession is ideal for the business owner’s needs. Because every business and ownership structure is unique, consulting an experienced business attorney is one of the most valuable steps a business owner can take. An attorney can help design a legally sound succession plan, minimize tax and liability risks, and ensure a smooth transfer of ownership when the time comes.
