Planning for Business Succession

by Karen L. Brady

According to an article by the Family Business Institute, about a third of family businesses have a chief executive older than 60, with an average age of 54. 11% are older than 71 years old. The same article reports that 40% of family businesses expect the leadership of their companies to change by 2008; well over half of family businesses expect a leadership change by 2013.

Many owners of small and medium businesses have been too busy building a business to think about how to transfer out of it. But those of us who provide business succession advice often remind business owners “You will leave the business — that’s a given. Do you want to do it horizontally or vertically?”.

The same article recommends that business owners plan their succession ten years or more before they plan to leave the business. While this would be ideal, I can’t remember a single owner who has come to me with that much lead time. Most of them want out sooner rather than later.

No matter how much lead time we have, I’ve helped them find the most advantageous way to leave the business, but more time can provide more options. For example, a business owner came to me recently in the hopes of leaving her business in about a year. She has a younger partner who is eager to buy her out. For many years, she and her partner have paid themselves a minimal salary and received the vast majority of their compensation in dividends. Unfortunately, many of the most advantageous methods to transfer the business to her partner involve the use of retirement plans that are based on averaging the salary over the last few years. With her minimal salary of recent years, we can only utilize those plans if she (a) is willing to accept a minimal retirement plan based on her minimal salary or (b) she pays herself a larger salary and continues working beyond her one year time frame to increase her “average” salary at retirement. Had she come to us with a longer time frame before her planned retirement, we could have offered her more options, and more attractive ones at that.

Yet, we can and will help this business owner, just as we have helped many others. If you’d like to know how we can help you, contact us