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Like many small-business owners, you may have poured a lifetime of sweat, time and capital into building your business. You may have begun thinking about retirement, and your strategy is to sell your company for a good price, settle back and enjoy a financially secure retirement. But sometimes our assumed best-case scenario doesn't always happen, and many don't make any other plans.
What are the odds of a person showing up at the right time with cash in hand to buy the company for a fair price? For thousands of small business owners each year, no one steps forward. Perhaps the business is too specialized or is tied too closely to the owner's unique personality and skills. Or maybe possible buyers equate retirement sale with a distress sale and make only low-ball offers.
That's why it's so important to prime a replacement – someone who will buy your company when you're ready to retire. Maybe this is a current co-owner, or it's your son or daughter active in the business, or a younger key employee.
Owners who successfully groom their own replacements leave nothing to chance, realizing there's no room for error at the point of retirement.
• Be cautious. Make sure your heir apparent is the right person in terms of temperament, personality, competence and personal goals.
• Set up a probation period so you can terminate the relationship if you find this person will not work out. During that period, keep everything informal, strictly verbal. Even when you go to a formal agreement, make sure to have a termination provision.
• Offer incentives to ensure your replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership prior to your retirement. This provides both parties with something to win by sticking to the agreement, and something to lose if it falls apart.
• Create a buy-sell agreement. With the help of your attorney, lock in who does and gets what, spelling out all details and caveats, including how to establish the final valuation of the business. This formal agreement protects everybody.
• Build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the plan. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work, but they leave much to chance. Instead, consider a funding vehicle that protects your family in the event of your disability or premature death, such as life and disability income insurance.
• Have a plan B. As a business owner, you know very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it's simply best to dismantle the business.
Whether or not you have a possible successor for your company, you should begin mapping out your retirement strategy today.
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Worcester Business Journal provides the top coverage of news, trends, data, politics and personalities of the Central Mass business community. Get the news and information you need from the award-winning writers at WBJ. Don’t miss out - subscribe today.
Worcester Business Journal presents a special commemorative edition celebrating the 300th anniversary of the city of Worcester. This landmark publication covers the city and region’s rich history of growth and innovation.
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