The Small Business Owner Transition Dilemma

What is the small busines owner transition dilemma? And how can you plan it succesfully?

The Business owners who successfully groom their own replacements leave nothing to chance. They realize that there is no room for error at the point of retirement. Following are some examples of the steps they take:

They are cautious. They make sure their heir apparent is the right person in terms of temperament, personality, competence, and personal goals. In most cases in which grooming a successor has worked, the choice was obvious from the start.

They set up a probation period so they can terminate the relationship if they find that this person simply will not work out. During that period, they keep everything informal, strictly verbal. At the same time, even when they go to a formal agreement, they make sure it contains a termination provision.

They know that dealing with an incompatible successor could tear the company apart, leaving everyone with nothing.

They fashion golden handcuffs and incentives to ensure that their 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. Both parties need something to win by sticking to the agreement and something to lose if it falls apart.

They put it in writing, along with the help of their attorney — locking in who does what and gets what and spelling out all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.

They 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. However, they are all pretty iffy, leaving too much to chance.

Instead, the recommended funding vehicle — one that can best protect your family in the event of your disability or premature death — is life and disability income insurance.

They have a backup plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled or — all too common — leaves because of a personality conflict?

Or what if there simply is no heir apparent waiting in the wings? Sometimes, it's best to dismantle the business. Recommendation: Whether or not you have a possible successor for your company, you should begin mapping out your retirement strategy today.