Preparing for a Well-Deserved Retirement: A Five-Year Business Divestiture Plan
For private business owners planning to retire, a succession plan is an essential consideration. This article presents the views of a contributing adviser, whose records can be checked with the SEC or FINRA.
1. The Succession Planning Process
A successful succession plan involves several strategic steps. First, evaluate your company’s structure, strengths, and weaknesses, and identify potential internal candidates for leadership roles. Develop a strategy that defines clear roles, responsibilities, and timelines for transitioning leadership. This includes building a “bench” of future leaders through training, mentorship, job rotations, and performance reviews to ensure readiness.
Establish or update governance structures such as a shareholder agreement, compensation policies, and corporate roles to ensure clarity, transparency, and conflict resolution, especially important in family businesses. Effectively communicate the succession plan to all stakeholders (employees, customers, suppliers) to facilitate a smooth transition and retain engagement.
2. Internal vs. External Sale Options
Internal successions allow continuity and retention of institutional knowledge, which can be nurtured via mentoring and gradual responsibility shifts. Options include management buyouts, employee stock ownership plans (ESOPs), or transfers within the family. On the other hand, selling to an outside party may maximize value but requires thorough preparation.
The decision between internal and external routes depends on business goals, family dynamics, readiness of potential successors, and financial goals.
3. The Role of Financial Planning in Retirement Wealth Gap Analysis
Financial planning software helps business owners model and quantify the "wealth gap" — the difference between current retirement savings and what is needed to maintain their desired retirement lifestyle. It integrates business valuation outcomes from succession planning (e.g., sale price or buyout terms), projected retirement expenses and income streams, tax implications, investment growth, and timing of exit.
By simulating various scenarios, owners understand how succession plans affect personal wealth and retirement readiness, allowing adjustments in the timing of sale or saving strategies to close any shortfall.
In summary, effective private business succession planning combines early assessment, leadership development, clear governance, and strategic exit decision-making. Integrating financial planning tools enables owners to link business transition plans with personal retirement goals, ensuring they understand and plan for any necessary wealth gap to retire comfortably.
- Baby Boomers own approximately half of the private businesses in the U.S.
- The ideal timeline for a business sale to retire is typically five years.
- A bidding process, letters of intent, and negotiation are typically part of the business sale process.
- In the wealth management space, transition plans can span three to five years.
- Service businesses tend to have longer transition plans compared to other types of businesses.
- Internal succession strategies include employee stock ownership plans (ESOPs), management buyouts, and intergenerational transfers.
- Financial planners can help business owners find the necessary contacts for the business sale process.
- External succession strategies can involve strategic or financial buyers, IPOs, or other external entities.
- The right firm is necessary to handle the business sale process, including the bidding, negotiation, and transition plan.
- Financial planning software can be used to find the "wealth gap". A free version of this software is available online.
- Financial planning plays a crucial role in evaluating the retirement wealth gap for business owners, as succession plans can significantly impact their personal savings by integrating business valuation outcomes from succession planning, projected retirement expenses, and investment growth.
- In the process of retirement planning, business owners may consider internal succession strategies such as management buyouts, employee stock ownership plans (ESOPs), or intergenerational transfers, which can provide continuity and retention of institutional knowledge, or they might opt for an external sale to maximize value, but thorough preparation is required either way.
- Effective succession planning for business liquidity requires a comprehensive approach that focuses on early assessment, leadership development, clear governance, and strategic exit decision-making, along with the judicious use of financial planning tools, which can help bridge any wealth gap that might exist between current retirement savings and future needs.
