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Succession Planning For Solo Businesses
Published Wednesday, January 23, 2008 at: 7:00 AM EST
That’s not what you want to happen, of course. You’d like your company to have value beyond your involvement in it, so you can translate years of hard work into a sizeable asset for retirement and your estate. That’s what succession planning can achieve. With a good plan in place, your business can give you (or your estate) one last payout.
A simple sale of a solo business, however, can be difficult to arrange and may yield a selling price far below what you believe the company is worth. Buyers may be skittish, worried that your clients won’t stick around—particularly if your business revolves around a personality-driven service relationship.
With foresight, though, you may be able to sell for a good price. One option is to make a deal a few years before you retire, offering to stay on board to effect an orderly transition with your clients. The more clients you are able to retain for the new owner, the higher the price is likely to be.
Another possibility is to take on a partner who will agree to buy you out when you’re ready to leave. That way, the partner has a chance to get to know the clients and should be able to keep most of them after you’re gone. From the clients’ point of view, they’re getting a known entity, and that should be preferable to starting over with a stranger.
Engaging a partner also gives you more flexibility about how and when you retire. You might simply want to say farewell at a specified time, or you could prefer to ease out of the business gradually. You could spend a few years trimming your full-time commitment to part time, ultimately working with only a few select clients before you retire completely. Such an arrangement should maximize client retention and give you a few extra years of income. If your partner agrees, you could even retain a small, passive stake in the company after retirement, giving yourself an ongoing stream of income and providing your heirs a nice payout when the partner buys back your stake.
Sometimes, though, death or disability makes an orderly exit impossible. The need for a quick sale, with little or no transition for your clients, can obliterate the value of your business. But even in these situations, it’s often feasible to extract some value—and the better your succession plan, the higher the price you or your heirs are likely to get.
If you become disabled and have a short- or long-term disability policy to provide some income, you’ll have more options than if you must sell immediately. You might hire someone to fill in temporarily, and depending on the severity of your disability, you may be able to stay involved with the business to some degree while you search for a buyer. Chances are, you’ll have to accept less than full value for the company, but you shouldn’t have to give it away.
In the case of death or total disability, the task of finding a buyer will fall to your heirs. You can help them now by creating a written succession plan. Make sure it includes:
- A list of likely buyers (talk to them first, if possible)
- Instructions about how to handle records, equipment, and sensitive information
- The names of advisors (attorneys, bank representatives, accountants, and financial advisors) who can assist with the sale
- A letter for your clients explaining the situation and endorsing the buyer as your successor
This succession plan should be as clear and direct as possible, and it should be backed up by an up-to-date will to facilitate a smoother sale. Your heirs will be grieving and distracted, and your succession plan can help them cope with the sale of your business during an emotional time.
Planned or unplanned, the sale of a “single shingle” business is seldom simple and lucrative. But thinking now about how your company might be passed along at your retirement or death can help ensure the best possible outcome for your heirs, the buyer, your clients, and even the business itself.
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