Business owners pour their hearts and souls into their companies, often investing many years, or even decades, into growing their work. Yet, as they reach the final years of their careers, the inevitable question looms: “What happens next?”
With over 33 million business owners nationwide, many of whom are nearing retirement, we are on the brink of a significant business transition. But as Baby Boomers start entering the ‘twilight phase’ of their careers, many business owners are not fully prepared to handle the emotional and financial hurdles involved in succession planning.
Here’s what you need to know about the business succession boom on the horizon and ways to prepare.
Succession Boom By the Numbers
Around 51% of small business owners[1] reported that they are over the age of 55 – nearing the average age of passing on a business, which is 63 years old. Nearly two-thirds (64%) of business owners in a recent Edward Jones study indicated they have a succession plan in place, meaning a staggering one-third of owners (36%) are not prioritizing succession planning.
While some feel their business is not yet at a stage where creating a succession plan is a priority (38%), there are a handful of reasons why others are delaying this process – whether it be fear of the business’ future, inability to identify a successor or confusion on where to start.
What Drives Transition Decisions?
When considering the right time for a business transition, leaders often ask, “Why now?” and “What do I need to prepare to ensure my successor is set up for success?” We’ve found that four key factors play into this decision:
- Legacy: Reflect on the legacy you want to leave. Confidence in your successor(s) upholding or growing the company’s values will make you feel more prepared to hand over the reins.
- Market: Recognize when an exit or a sale might be necessary. If you sell your business at the right time, you can be better set up for retirement. Working with a financial advisor can also help you better understand the value of your business.
- Mission: Outline your company’s mission statement and vision in writing (i.e., identifying short-term and long-term goals). To maintain the integrity of your business, you must be able to articulate your vision to potential successor(s).
- Cause: Unforeseen circumstances, like health emergencies, might necessitate a sale or transition. If your business is hindering you from dedicating time to other values important to you, like family time, it might be the right time to exit.
Hurdles to Business Transitions
Navigating the hurdles to succession planning can be challenging. These hurdles often depend on the size of the company, with larger businesses typically facing more financial and legal issues (40%). For smaller businesses, the focus tends to be on finding a successor who can maintain the company’s culture while driving growth.
Working with a financial advisor can help business owners feel more prepared. Even if a business owner already knows the succession plan that they want to put in place, a financial advisor can guide them through the complexities and challenges owners face when determining and implementing the future of their business.
Emotional Transparency
Stepping away from a business after investing extensive time and capital into it is no easy feat. Succession planning is often fraught with emotional challenges, as many owners fear that they will feel ‘lost’ after stepping away from their business.
Emotional strife can be even more complex when family is involved, as our survey found that roughly half of appointed successors (47%) are family members. While choosing a successor could cause potential conflict, emotional transparency with those involved in the transition helps establish trust.
Identifying a Successor
Continuity is key in operating a successful business, which is why 41% of business owners expressed concerns about their businesses continuing to operate smoothly after their transition is complete.
Choosing the right business successor requires several years of strategic planning. Among those who have created a succession plan, roughly seven-in-ten (69%) have already designated a successor and are actively training/preparing them. Likewise, planning early and identifying successors who are a strong culture fit can help ensure a smooth transition.
Financial Challenges
Nearly 38% of business owners cite finances as a significant hurdle to their transition success. Delicate issues such as valuing the business, managing tax implications and ensuring liquidity for retirement or reinvestment require careful planning and professional advice.
Yet our research found that only 37% of business owners are currently using a financial advisor, underscoring the need for more comprehensive planning and guidance.
What Should Business Owners Prioritize when Succession Planning?
To overcome these hurdles and ensure a smooth transition, here are some proactive steps you can take:
- Early Planning: Our research found that 31% of business owners wait only one to two years before the transition to begin discussions with their appointed successor. Business succession planning is not an overnight process – think about next steps several years in advance and develop contingency plans for unforeseen events.
- Set Goals: Define clear objectives that encompass both business (i.e., maintaining profitability) and personal goals (i.e., preserving legacy) to fairly assess candidates. Key performance indicators (KPIs) include leadership skills, business knowledge and culture fit. Identifying and evaluating potential successors within and outside the company is also important.
- Professional Development: Provide development opportunities and training for successors to best prepare them for leadership. At the same time, invest in professional development for yourself! Talk with legal and financial advisors, conduct research and keep an eye on market moves to help structure your plan.
The Path Forward
Proper succession planning requires a tailored approach that addresses the specific challenges and needs of your business. By identifying these hurdles and what you need to prioritize early on, you will be better prepared for the fast-approaching business succession boom.
For more insights into business succession planning and to learn about the latest research, visit Edward Jones’ Next In Line.
Zach Gildehaus is a strategist on the Client Needs Research (CNR) team at Edward Jones, where he is responsible for advice and guidance for business owners. He has been at the firm for 11 years and has nearly 15 years of experience in financial services.
[1] U.S. Census Bureau
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