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updated: 2/3/2017 10:34 AM

Options for growing number of aging business owners

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  • Pat McMahon

    Pat McMahon

  • John E. O'Connor

    John E. O'Connor

  • Colleagues discussing their future financial plans, only silhouettes being viewed

    Colleagues discussing their future financial plans, only silhouettes being viewed

 

There is a trending tsunami of aging business owners.

It's no secret that the population of the United States is aging and demographics are shifting: 78 million baby boomers are approaching retirement. By some accounts, there are almost 28 million small business owners in the U.S., many baby boomers who will soon be considering retirement.

The challenge for these owners is what to do with their businesses. In the next 10-15 years, it is expected that more than 8 million privately-owned companies will be sold or transferred. When the time comes to exit their business, owners face several options.

What options do privately-owned business owners have?

What is the best approach for succession planning? Keep, transfer by gift, sell?

Business owners may choose to retain passive ownership and play a passive role in management but turn day-to-day management and operations over to key employees. This can be difficult because talented key employees must be in place to manage and operate the business and business owners often have a substantial amount of their savings and net worth tied up in their companies and may have to sell to fund their retirement.

Some owners may transfer ownership to the next generation of family. To be successful, owners should have family members in place who are interested in running the business and such family members must have the necessary skills and capabilities to manage and operate the business. Additionally, any such transfer must take into account financial requirements of the transferring owners and the owner's possible reliance upon the proceeds from a sale to finance retirement. Successful family transitions require years of planning and preparation. A proactive transition plan should be in place and implemented at least five years before an exit date. The health and longevity of a family business depends on a calculated transition plan.

With business owners having a substantial amount of their net worth tied up in their companies and needing to fund retirement, and transitions to family members being too challenging for some, the majority of aging business owners will sell their business. If you are planning to retire in the next five to ten years and plan to sell your business, planning should be taking place now to position your business to obtain the maximum value.

If a sale is the best option.

Some top factors that determine a fair sale price:

• Financial strength- overall financial performance as well as financial performance compared to others in the industry. What is the cash flow? What does future financial performance look like? Has there been documented growth?

• Management and the sales team: Can the business continue to successfully operate without the owner? Many small businesses rely heavily on the owner for sales and management. If you plan to sell, have management and sales teams in place outside of ownership.

• Customer concentration and loyalty: Sales drive revenue and value in a business. If a majority of revenue is concentrated among too few customers, the sales price may be reduced because the loss of a small number of customers has a dramatic impact on revenues. Stable and loyal customers mean stable cash flow, reduced downturn and can increase a sale price.

• Proprietary product or services: If a business has created their own technology, process, product or service and can protect it, sale price can be significantly enhanced.

If a transfer to family is the best option.

To whom should the business be transferred? In the distant past, it may have been the eldest child or son. This practice is outdated and can lead to mistakes, inefficiencies and a failed business. To determine the best choice, consider:

Are any children interested in working in, running and managing the business?

Which children have the skill set to successfully manage and operate the business? Outside assistance, temporarily or permanently, may be required.

Experts are needed at every step of any transition. Remember, most business owners have not been through an acquisition, divestiture, transition or succession planning.

• John E. O'Connor III and Patrick M. McMahon are with Drost Kivlahan McMahon & O'Connor LLC in Arlington Heights.