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There are more than 30 million small businesses in the United States — classified as those with fewer than 500 employees. Of those, about one in three are family owned.
That translates to millions of owners who would probably like to, one day, sell their businesses — and rightly so. A solid succession plan can help an existing owner fund a well-earned retirement, valued employees enjoy stability in their jobs, and a new owner realize their own dreams of leading a company.
Unfortunately, 45% of small and midsize business owners don’t have a plan in place, according to a 2022 Principal study. Even with a plan, owners might encounter obstacles that lead to failure.
But you can set yourself and your sale up for success. Here are some common stumbling blocks to avoid.
You wait too long to identify a new owner
The earlier, the better. If you don’t have a person or a company in mind, start looking five to 10 years before you want to transition out of ownership. It’s even more important to start discussions early if you have co-owners, especially if one wants to continue in the business.
You aren’t sure how much your business is worth
Before a potential owner can determine if they can buy a business, you need to determine a fair and realistic price. Start with an informal valuation based on an estimate that analyzes the company’s financial position. A formal valuation becomes important the closer you get to the actual sale.
The new owner hasn’t arranged financing
In many instances, owners want the business to go to a key employee. A common challenge is when the key employee doesn’t have the financial means to buy the business outright, so owners generally need to work with them to find financial terms acceptable to everyone. The more preparation time, the more options. For example, a company with an owner who wants to step back but remain involved might use an employee stock ownership plan (ESOP). In other situations a key employee equity compensation plan or a nonqualified deferred compensation plan could help create a down payment along with a buyout plan.
You haven’t talked to your heirs
Owners in a family business might not communicate effectively because the subject matter is uncomfortable. Your job is to be frank and direct — with everyone, even those family members who are outside the business. If one heir is expecting to run things and others haven’t been involved (but want to benefit from a sale), you’ll have to navigate expectations.
You haven’t consulted with experts
Build a team that includes legal and tax experts as well as a financial professional to help guide you.
You have an agreement in place but haven’t reviewed it in years
A yearly check-in helps ensure you’re still comfortable with the transition plan and that the new owner hasn’t had any big changes that might impact timing or completion of the sale.
You haven’t enlisted key employees
Most succession plans depend on crucial expertise and institutional knowledge to help smooth over any bumps and ensure the business can thrive. Strategies to retain key employees — such as deferred compensation plans — can help.
You can’t let go
Owning a business is hard. You’ve likely given decades of your life to building it and letting that pass on to the next owners might create more emotional distress than you imagined. You’ll feel better if you give everyone (including yourself) time to transition, prepare to lead, and accept that you’re moving on.
This article is intended to be educational in nature and is not intended to be taken as a recommendation.
Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Company®. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392. ©2022 Principal Financial Services, Inc.