When Planning for Retirement Includes Planning for Business Succession

How prepared are most small business owners for retirement?

According to a recent Census Bureau report, by 2029, when all baby boomers will be at least 65 years old, they will represent 20 percent of the population of the U.S. Economists estimate that 10 million small-business owners plan to sell or close their businesses over the next 10 years in order to fund their retirement. There are indications that up to 65 percent of businesses sold during the past years were sold by baby boomers.

Since this trend is expected to continue, the economic landscape of the country is expected to transform. All research gathered by the Financial Planning Association, however, indicates that small business owners may be unrealistic in their retirement planning. Although 78 percent of these entrepreneurs are planning to fund 60 to 100 percent of their retirement with funds they derive from selling their businesses, less than 30 percent have actually written a business succession plan! If you are a small business owner, it is imperative that you work closely with a skilled estate planning attorney to establish a business succession that will ensure your legacy and protect your heirs.

In spite of the best efforts of estate planning attorneys and financial planners, business owners seem to neglect the business succession aspect of professional advice. Although 94 percent of professionals questioned reported discussing succession plans early on with their clients, it is well-documented that business owners procrastinate with this area of estate planning.


Problems Parting With Your Small Business

One of the problems seems to be that many small businesses are run more like jobs than investments — the owner does the majority of the work and the profits are perceived as salary rather than operating income. This makes it very difficult to assess the true value of the company. In a great many small businesses with companies having annual proceeds of between $100,000 and $10 million, the owners don’t seem to take in the importance of a succession or exit plan until they are nearing retirement. It is only when the wolf is at the door that they suddenly recognize the problems involved in marketing and selling a small business when there is no family member or other close person ready to take it over.

Another difficulty with planning for business succession is the deep emotional connection owners have to their enterprises. Because they have put so much of themselves into the business, it feels a bit like their “baby,” well-loved and extremely hard to part with. Evidence of this personal bond can be found in the fact that more than half of small business owners sell their companies to family members (31 percent) or trusted employees (23 percent). Because of the close ties involved in these sales, as many as 42 percent are financed by installment sales and earn-out arrangements.

Brian Chew, the managing partner of OC Wills & Trust Attorneys, has extensive experience in the areas of estate planning, asset protection planning, business succession planning, long-term care planning, and veterans’ benefits. By devoting his practice to estate planning matters, he has founded a firm that strives to provide exceptional service to their clients by working closely with individuals and their families to create comprehensive and customized estate plans. For the past twenty five years, Brian has served thousands of clients in the matters of estate planning, wills and trusts. If you have any questions about this article, you can reach Brian Chew here.