As the owner of a small or medium-sized business, you have almost certainly given some thought to retirement. Be the ant, not the grasshopper. Before the day arrives, make sure that you leave behind a company that's prepped and ready for new ownership. Why is succession planning so important?
Increase Your Firm's Value
It’s understandable if you focus most of your energies on how much your business is worth now, not what it might be worth on some far away day when you've decided to move on. Unfortunately, this kind of thinking can result in short-sighted management decision making that reduces long-term value. This makes it more difficult to find a buyer.
For instance, in a survey of rural owners who had recently purchased an existing business, 26% cited “problems with the building or property" as an impediment to finding a suitable company to purchase. Often the previous owners, approaching retirement, had failed to maintain their buildings properly in order to reduce property taxes, when they should have kept them in good condition to preserve resale or inheritance value.
A well-constructed succession plan can help grow your enterprise and increase its profitability, even years before a planned exit. This is because the process includes evaluating its current and projected resale value, identifying specific strengths and weaknesses, and developing a business plan that boosts stability and profitability.
Stay Ahead of the Market Curve
Due to the gradual aging of the U.S. population — two-thirds were born before 1967 — a “silver tsunami" of retirements among small business owners will increase rapidly over the next several years.[2-3] For instance, 12,000 to 16,000 professional financial advisors are expected to retire each year over the next decade, while 50% of homecare business owners would like to sellout within five years.
At the same time, numerous studies indicate that most small-to-medium sized companies in the United States have never formally adopted a succession plan. Among home improvement (hardware) retailers, only 28% have one; less than half of those have it in writing. Only 8.3% of business owners in the homecare sector have a written plan on file.
Overall, smaller companies are less likely to have a plan on file. Among business adviser firms, 13% of those managing less than $50 million in assets have one, compared to 60% of those with over $500 million on the books. Among family firms, the practice may even be declining, with only 23% reporting a “robust, documented" plan, compared with 27% two years ago.
Companies that have a solid succession plan may be better positioned for sale than those that do not, offering buyers or heirs a more competitive business. If you have a strong succession plan, you may be several steps ahead of other companies entering the market to sell their business. You will have created a competitive advantage when the time comes.
Where to go from here?
Business succession planning is a financially and personally rewarding process, but it can also be emotional and complex. Let's start with the basics:
How Should I Transition My Business?
- Do the math to see which option makes the most sense for you. Understand the difference between cash and cash flow.
- Take a realistic look at maximizing your retirement income.
When Should I Transition My Business?
- Assess your business's competitive dynamics.
- Identify your exit objectives.
- Discern market conditions.
- Evaluate your company's attractiveness and readiness to go to market.
What is My Business Worth?
- Avoid valuation traps that can give you an inaccurate picture of your company's worth.
- Understand the difference between estate valuations, financial valuations and strategic valuations.
Who Should Benefit from the Wealth I Have Built in My Business?
- Customize your succession plan based on your personal objectives.
- Learn the importance of developing a plan early.
- Create a trust or “protective wrapper" to shield from future litigation.
Key Drivers to Successful Business Succession Planning
Base your succession plan on four critical pillars — competitive positioning, capital market conditions, shareholder dynamics & objectives, and changes in tax laws.
Ready to Help
PNC’s corporate and wealth team has the experience and financial modeling tools to help you “fast forward" down the road of life as you decide when to transition your business. Take the guesswork out of the equation and make sure your team understands your objectives.
We can outline your options so you can gain control of perhaps the most important financial decision you will make during your lifetime. Contact your PNC relationship manager to further explore business succession planning.