Blog: Retirement and Succession Planning For Small Business

on October 11, 2016

My dad had what he thought was a foolproof succession plan for his carpet business. We were all still fairly young when dad passed away (I was only 20), and so his plan at that time had to figure in our ages. In his will, my father divided the business into five shares. My three siblings and I were to each get one, 20% share of the business apiece, and dad’s general manager of the business would get the fifth, 20%, share.

The plan was that the manager would run the business, if needed (and it was), until one or all of us was ready to do so. But in the end, however well-intentioned, it was an unsustainable plan. I was the most likely to take over the business, but I was a good seven or eight years away from being ready to do so. And anyway, within two years, the manager was quite unhappy: Here she was, running this business, and 80% of the profits were going to my siblings and I. In the end, we sold our 4/5 share of the business to her.

All of which is to say that that when thinking about retiring or otherwise passing your business on to someone else, a lot of thought and planning has to go into the process.

Like so many Americans, it turns out that a lot of small business owners are in fact not prepared for retirement. But the good news is that, to paraphrase the Wizard in The Wizard of Oz, ‘they got one thing most folks haven’t got – a business.’ And it is that business I want to focus on today; let’s look at how to maximize its value for you (as a retirement asset) or your loved ones (as an estate asset):

Get things in order: Whether you plan on passing your business on to your family or selling it to plump up your retirement account, you will need to get an accurate valuation of it (see below). And to do that, you start by getting the business in tip-top shape:

  • Get the books in order: The fact is, entrepreneurs are great at many things, but accounting is not always one of them. If this describes you, it would behoove you to hire a CPA and get the books in order, including a list of assets, a profit & loss statement, a list of accounts, etc.
  • Spruce the place up: Just as you would get your home ready before you put it on the market, so to do you need to get your business ready. Clean out the back storeroom. Paint if needed. Get it in ship shape because you will need to

Get a valuation: You likely have an idea of what your business is worth, but just as likely, it is more a notion than a legitimate number. And the reason is that evaluating the value of a business is not what you do for a living.

What you need is a professional valuation by a business broker or appraiser. Most businesses are appraised by looking at the assets, subtracting the debts, and giving a multiplier to the profits (it depends on the type of business and industry whether your multiplier is 2x profits, or, say, 6x profits.) But a professional will know. They will review your financials, look at the business, analyze profits, know the multiplier, and give you a value for the business.

Once you have that number, then you need to

See an estate-planning lawyer and/or accountant: When looking to sell, or pass on, your business it is neither the time nor the place for playing lawyer or accountant. Again, this calls for a professional, maybe two.

If you are going to sell it, your estate-planning lawyer or accountant should have some valuable strategies in place to help you, for instance, mitigate taxes. He or she will also likely give recommendations on how to best invest this money into various retirement vehicles.

If you are going to pass it on to a spouse or the kids, knowing what it is really worth will be invaluable to you and your professionals as you look to divvy up your estate. Your attorney may advise that you set up a trust and put the business in it, or sell it when the time comes, it all depends.

The most important thing to remember is that you have created a substantial asset in your business and the smartest retirement plan is to maximize its value for you and your loved ones.