The term “silver tsunami” references the rapidly aging populations of developed countries around the world – the United States is no exception. By 2030, the Baby Boomer generation – about 76 million strong – will be at or beyond retirement age. Around this time, it is estimated the US population over 65 years old will outnumber those under the age of 18. This population shift has implications for small businesses, as 41% of the small businesses are owned by Baby Boomers. While recently many boomers have delayed full time retirement, whether due to the impact of the Great Recession or COVID, a large segment of the population will be focusing on transitioning their business in the coming years as they prepare for their next phase. While the concepts related to succession planning are simple, the execution of it rarely tends to be easy. These statistics alone are enough to get you wondering!
- Less than 1 in 4 private company boards say they have a formal succession plan in place according to the National Association of Corporate Directors.
- Per Deloitte, only 30% of family-owned businesses survive to the 2nd generation – 12% to the 3rd, and 3% to the 4th and beyond.
- According to a University of Connecticut Family Business Program, the death of the founder preceded 47.7% of business failures. Similarly, 29.8% of businesses failed after the unexpected death of the owner.
Succession planning is designed to help business owners understand how their business is valued, how to preserve and grow its value, and how to successfully pass the business on to others intact. If there is anything in you that wonders if you should have a succession plan, the best thing to do is act now. At least start the conversation as there are a lot of steps you can take to encourage success before the actual sale occurs.
For example, your business would typically undergo an assessment that reviews the business strategy, managerial talent, corporation structure, and external economic environment. Some founder operated businesses don’t naturally have the corporate governance expected to realistically continue or scale the business without the founder at the helm. Believe me, this is better to find out now and not 2 or 3 years into a new leader! Owners will need to ask themselves, “Do the personality profiles required by key positions align with the profiles of your successor?” It is not often in a sale of a business that an acquirer’s operating rhythm is the exact same as the sellers’ - even between family members. As long as you and the new leader are aware and prepared to manage this, it is not bad, but it can create friction between the old and the new. A great place to start is long before the sale is finalized. Maybe there are practices you and your current management team can adopt prior to the sale that would reduce the transition pains to the new style?
It’s important not to forget about how all of this will affect the exiting owner. Planning for a life post-business incorporates a multitude of new responsibility, including planning an estate, creating trusts, identifying charitable giving opportunities, preserving familial harmony, income tax management, investing post-sale liquidity, and ultimately finding purpose beyond the business. Additionally, sale transactions approaching $50 million or more may require the establishment of a family wealth office to oversee financial affairs into the future.
It’s worth mentioning that the business transition does not have to occur all at once. Some owners actually prefer to retain their equity while new management is running the company. Owners ready to have a partial liquidity event today may consider selling a minority stake in their company or pursuing a dividend recapitalization. Simply put, selling a minority stake means still having a liquidity event and getting paid out partially while still retaining control. On the other hand, pursuing a dividend recapitalization achieves the liquidity event without equity dilution but adds unproductive leverage to the business. These strategies could help facilitate the creation of a foundation, family wealth office, or provide a financial partner to accelerate business growth.
There are numerous resources – books, consultants, trade organizations – ready to assist with succession planning. The bankers’ role in this process is to connect others. At CSB, we have been able to help owners think through this simple but not easy transition and add value through our collective experience. Reach out to us today to see if our team can help you and your business!
Written by Aaron Schaffer
Chief Banking Officer at Community State Bank
aarons@csbemail.com
260.994.0450
February, 2024
Chief Banking Officer at Community State Bank
aarons@csbemail.com
260.994.0450
February, 2024