Retirement and Transition Plans

Building a business transition plan for retirement

In anticipation of your business's transition, prepare your goals for passing it on, research the industry and business value, and identify the professionals you'll need for the process.

Published: June 13, 2014
Updated: February 22, 2017

As a small business owner, you may not be thinking about selling your business or retiring right now. However, it is important to plan far ahead for such major events. 

The business often represents the single largest asset on many business owners' personal balance sheets and comes with a lifetime of focus, energy, sacrifice and hard work. This can make the time spent planning for a business transition a period of high stress and emotion.

For this reason, many owners find participating in a comprehensive business transition planning process especially valuable. It can help you clarify your business transition and exit planning goals, objectives, and motivations, including identifying when and how you intend to transition from the business or retire.

The transition planning process consists of these six sequential steps:

  • Identify business transition planning goals and objectives – Explore personal and business objectives and the ideal transition timeline. This can entail learning more about your personal financial and retirement planning goals and needs, the senior management and leadership team, rank and file employees, and other stakeholders.

  • Analyze the business – Industry dynamics, company performance (both historical and forecasted) and positioning, and market conditions can greatly impact what a company is worth — and, therefore, your transition alternatives. This step often incorporates economic and industry specific research, in addition to financial statement analysis and industry benchmarking. The company's plan for management succession should also be reviewed.

  • Determine a preliminary range of values for the business – Regardless of the method of transitioning the business, a preliminary estimate of what the company is worth helps to confirm that the anticipated range of values is acceptable (i.e., not too low) from a shareholder’s perspective. This estimate is especially helpful early in the business transition planning process, as shareholders assess, evaluate, and compare the economics of different transition options at the same time.

  • Identify transition options – Most owners face a predictable set of strategic alternatives for the transition of their business. These alternatives can differ in material ways depending on an owner’s objectives, the company’s positioning within the industry, and market conditions. The business transition planning process typically includes a review of several transition options at the same time, ranging from maintaining the status quo, transferring to the next generation, to management, selling to third parties or even going public through an initial public offering (IPO).

  • Review options for funding or financing the transition – Sources and uses of available funds often determine or limit an owner’s business transition and exit planning options. Most transitions involve some form of financing or funding from a debt or equity sponsor, such as a commercial bank, mezzanine capital, private equity, etc. Otherwise, by default, seller financing can play a large role in a transition, thereby limiting liquidity for the seller while retaining significant risk related to the future performance of the business.

  • Develop an implementation strategy and timeline – Implementing a business transition plan requires a team of professionals. In addition to a CPA and attorney, a business owner should have a wealth advisor and may often need an experienced investment banker, business appraiser, and/or other specialists to help implement the strategy. This requires communication and early identification of the necessary steps, as well as estimating a timeframe for completion and naming responsible parties for specific aspects of the plan.

While business transitions can be complex, following a disciplined process can help owners to confidently plan and execute a successful business transition and maximize outcomes for all stakeholders.