When the economy sours, small business owners start to get nervous—about letting employees go, declining sales and myriad other issues. Exit-planning experts say owners should also consider revising their succession plan.
In a bad economy, the good news is, small businesses are still sellable, says Kevin Waldron of Waldron Consulting Group in San Francisco—some mid-sized and larger companies make acquisitions to stay alive. The bad news is, buyers are pickier and do more due diligence than is customary.
When you re-evaluate your succession plan, here are seven questions to ask yourself:
1. What are your objectives?
Determine how much income you need to retire and achieve financial objectives. Also, determine your desired departure date and your preferred successor (a family member, a key employee or a third party).
“Finding this out can be a harsh reality,” says Waldron, since the value of your business will have likely declined. A CPA can estimate its worth, he says.
3. How can I make the business more valuable right now?
Once you know the current value of your company, try a few strategies to boost its worth. Improve employee turnover, since buyers like stability. And institutionalize your business processes, especially in sales and marketing. “Make sure your business is a turn-key buy,” Waldron says.
4. Do I want to sell to a third party?
If you plan on selling the business to a third party, maximizing the amount of cash involved in the deal can add more certainty to your retirement. Ask for more cash up front.
5. Do I want to transfer ownership to family or a key employee?
When selling the business to a family member, such as a son or daughter, or a loyal employee, you’ll probably have to structure the sale over a longer period of time because they don’t have enough cash on hand to pay out the entire value of the business. That means your retirement funds will come in the form of scheduled payments.
The value of the company will fluctuate, so it’s important to tie monthly payments to the business’ valuation the day you leave, not its value in the future. However, if you’re selling to family and don’t want to create a hardship if the business’ value significantly decreases, a deal can be structured so their payments tie to the current value—just know you’ll be putting your retirement funds at risk."
6. What would happen if something happened to me?
Succession planning outlines your retirement, but it should also outline business continuity in case of illness, injury or death. (For more information on this topic, read our MyBusiness magazine feature, “The Succession Planning Crisis.”)
7. What will my income be?
If your retirement funds—such as the valuation of your business, your stock portfolio and any other investments—have suffered, this will affect your retirement date. You’ll either have to stay in business longer, or leave with less money. “There’s no magic bullet. It’s a reality you’ll have to face,” Waldron says.
Related Resource: 5 Basic Retirement Planning Tips