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updated: 3/28/2017 12:11 PM

Demographics complicate succession plans

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  • Susan L.  Dawson

    Susan L. Dawson


 

Here's the problem: 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. Wondering 'what's the catch'?

There won't be enough buyers to go around.

Why? There are 76 million baby boomers out there, and about 46-50 million Generation X-ers.

There simply are not enough Generation Xers around to take over.

Even if you are lucky enough to have a Gen-Xer waiting in the wings, consider the timing involved. Let's say an owner is quickly approaching 70 and has decided he's ready to retire. He is planning on transitioning to his sales manager who has been with him for 20 years, a 51 year old Gen-Xer. They agree on a buyout structure taking place over 7 years (5-10 years is typical). When that Gen-Xer is done buying out the owner, he's 58 years old. Now he's starting to think about retirement, but after paying off the owner he needs a few years to recoup his financial investment and save for his own retirement. Plus, he'll need to have his own succession plan in place, because his transition to the next owner might also take 5-10 years. So in essence, he's almost out of time to make this work.

By the numbers, that means millennial employees, some 76 million of whom are in the workforce, need to be incorporated into many succession plans. Whether one or two generations removed from current ownership, millennials are the future of a business. The hard reality is that owners who wait too long to plan their transition will have to find ways to include millennials as part of the plan. And, the disparity between the baby boomer and the millennial mindsets can be difficult to bridge.

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, etc.) because they know they have competition and they want to lock you in. But what if you only had 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. Landlords 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. Or, you could be stuck in the same negotiating position -- your key employees know you want out and will use that to leverage a better deal for themselves.

Bottom line: identifying a transition plan and the key employees you need to make that plan successful at an early stage of your businesses can help pave the way to a smooth, mutually beneficial transition.

• Susan L. Dawson is with Rolling Meadows-based Waltz, Palmer & Dawson LLC.