Business Succession Planning: Most Small Business Owners Don’t Have a Plan for Retirement

Any small business owner can tell you about how much they have given to building their companies. But what about business succession planning, when it comes to making their exit on the backend?

Whenever, and however, they decide to step away, are these entrepreneurs as ready as they could be to enjoy the hard-earned fruits of their life’s work? A survey by Wilmington Trust offers some answers.

It’s no exaggeration to say that small businesses play a big role in America. Both Project Equity, a non-profit group focused on economic security, and the U.S. Census Bureau estimate that there are approximately 2.34 million small businesses in the U.S. These companies employ about 25 million people and, pre-pandemic, generated roughly $5 billion annually in aggregate revenue.

Yet while small business owners are actively involved with their enterprises, a study by Wilmington Trust found that many of them don’t have transition plans. What’s more, a large percentage of these entrepreneurs haven’t even thought of any business succession planning.

According to Ernst & Young’s Family Business Center of Excellence, the average age at which small business owners start transitioning from their businesses is 62.

For a lot of entrepreneurs, succession planning will likely cover some sort of transition to retirement. Or it might be a lifestyle in which they remain plugged into their communities, but they might not be as active in their companies as they were in earlier years.

However, in the study, nearly 60% of small business owners didn’t have a formal business succession plan of any kind currently in place. Moreover, 11% of this group hadn’t even thought about having a transition plan at all.

How Many Did Have a Business Succession Plan?

Only 21% of small business owners reported having a specific transition plan set and having started executing on it. Nearly 5 in 10 (47%) small business owners over age 65 didn’t have a retirement plan.

Among those of ages 55 to 64, 57% lacked a plan as well. Furthermore, nearly half of all small business owners aged 65 and above didn’t have a specific transition plan laid out.

Reasons for Not Planning for a Business Transition

Over three-quarters of all business owners who didn’t have a succession plan in place said it was because they enjoyed running their businesses so much that they hadn’t thought about it.

According to Wilmington, those who have a solid transition plan in place can still run their businesses, while maximizing their business’ values, and reduce their tax bills.

Forty-four percent of respondents without a plan also said that they felt that a transition was too far in the future to worry about now. Another 42% said that they are simply too busy at this point to deal with creating a transition plan.

About two-thirds of small business owners felt like they had a fairly good idea of what their business was worth. But a majority of this group also said that they would like to consult with a business valuation specialist regarding the value of their enterprises.

Among Those with Succession Plans, What Prompted Them to Act?

When it comes to priorities for why they had a transition plan, small business owners gave the following factors as top reasons:

• Getting older (67%)
• Providing security for family (55%)
• Meeting their business valuation goal (35%)
• Reducing taxes (35%)

Business owners also said that their top transition goals were to ensure that their businesses remain viable enterprises for the long run and also making sure that their employees and customers are properly taken care of.

What About the Risks Tied to Selling?

Another big factor in the survey was liquidity risk, or the possibility of a business selloff not bringing the proceeds — or even sale timing — that the business owner would need or want.

Many of the small business owners said they would like for their companies to create multi-generational income streams.

But they also recognized the threats:

• Their company not remaining competitive,
• Their loved ones not wanting to be part of the business, or
• The uncertainty of when the business might be sold could pose continuing risks to their operations.

As noted earlier, small businesses employ millions of people. The uncertainty facing these small business owners, in turn, could have “spillover” effects for working Americans who are near retirement age.

What Can Small Business Owners Do to Plan for a Transition?

Everyone’s situation is different, and working with experienced professionals in business law, taxes, valuations, and other relevant fields can help in determining a path forward.

But here are some thoughts from Wilmington Trust and other sources as a starting point.

1. Get a Team Together to Benefit from Their Life’s Work

One step is building a team of specialists to help small business owners maximize the value and future proceeds of their business.

This team ideally includes experts in personal wealth management, trusts, business transition structures, and taxes.

2. Plan for Other Assets Besides the Business

The next step for ensuring a comfortable financial future? Start planning for assets outside of their business to fuel their retirement lifestyle.

There are a variety of retirement accounts designed specifically for business owners to accumulate wealth. These options include individual retirement accounts, certain 401(k) workplace plans, or even personal defined-benefit pension plans.

If they are behind in accumulating external assets, a financial professional can help them get on track for attaining the amount of wealth they need for their preferred lifestyle.

This situation isn’t uncommon. Entrepreneurs tend to pour their money and entire lives into their businesses to keep them going and growing.

If a small business owner has built up sufficient wealth, they should consider whether their current portfolio allocation will help them fulfill their lifelong-held goals.

A careful look at their financial picture might identify gaps — whether it’s having enough cash-flow or reliable healthy income streams as a high-income household. Or it could be devoting some assets to provide some financial relief in otherwise costly areas such as healthcare and long-term care.

These are just a few areas in which financial gaps might arise.

3. Visualize What the Business Transition Will Be

Another crucial step is envisioning what a business transition will look like.

Will family members take over? Will they have some sort of minor role in the business? Do they want any role at all? Do they have the skill set to keep the company competitive and growing?

Or does their vision entail looking for external parties to buy out their company? Do they wish to leave their business to their employees, whether a select group of key employees or their entire employee base?

What will the tax implications look like, especially in relation to the rest of their financial picture?

These questions and others are important to answer at this point in time.

4. Create a New Lifestyle Vision

Many entrepreneurs are go-go-go. It’s hard for them to sit still or to envision a lifestyle outside of the company they have spent so much time building, refining, and operating.

For a solid transition into retirement — one that promotes socialization, community, good health, activeness, and fulfillment — business owners should start thinking about what their ideal lifestyle will look like now.

They might even consider test-driving this desired lifestyle for a few months. That can be beneficial in a number of ways.

Not only could they start envisioning life away from their companies, but their employees can benefit from the change in environment and operation that come from their absence.

Putting Your Own Business Transition Place in Place

No matter where you might be in your business succession planning, there is no time like now to start having your financial affairs put into order.

This can help make a difference in your financial goals, including for your company’s future, your ability to enjoy the results of your life’s work, and your financial peace of mind for what might lie ahead.

Consult your financial advisor today for more information on business succession planning and how it can benefit you.

What if you are looking for a financial professional to help you create a retirement strategy besides “my business is my retirement plan” and see how you can have more financial confidence? Many independent financial professionals are available to assist you at SafeMoney.com.

If you are interested in exploring a potential working relationship, please use our “Find a Financial Professional” section to get started. You can connect with someone directly and discuss your business history, personal situation, goals, and concerns. Should you need a personal referral, please call us at 877.476.9723.