Retirement is a lifelong goal for all, but it is not uncommon for some to reach that goal later than anticipated, especially for business owners. Many business owners love their work so much, that they’ll never fully retire, while others may delay retirement out of circumstance. At some point in a business owner’s life though, a succession plan must be addressed.

According to the Small Business Administration, less than one third of family owned businesses endure a successful transfer to the second generation, about one tenth survive past the third generation, and only three out of every 100 small businesses are successfully transferred to the fourth generation.

Retirement planning can be multifaceted, but becomes much more complex when there is a large business ownership position at stake as well. By being proactive and creating an effective succession plan, it can take much of the stress and negative consequences out of the overall estate planning. With the business succession plan in place, one can strategize with confidence and have a plan when they retire.

Creating a business requires principal, and typically dividends and excess capital are reinvested into the business to either improve or expand the operation. With many business owners in this situation, retirement plans may not be properly funded or structured, if at all. Through succession planning, small businesses and their family members will benefit, by creating a defined method for the owner to have an income stream throughout retirement, and a plan in place to transfer the ownership to the heirs.

Another concern arises in the event of severe illness, disability, impairment, or death of the owner, which could leave family members or the businesses heirs at a loss for how to fund the operations of the business in the future.  One common strategy implements an insurance policy as an “exit strategy” for a business owner to leave the business, whether foreseen or not. In case of disability or death, the insurance policy would provide the necessary income to maintain operations, or to provide enough capital to sell the business to a partner, known as key man insurance or a buy/sell agreement.

Before considering any “exit strategy”, there are many considerations that need to be settled by the owner, such as who the owner wants to transition the business to, how to maintain operations, when they would like to exit the business, and how much they would like to sell the business for.

When it comes to selling or gifting the business to heirs, it is critical that a proper business valuation is completed to obtain a fair valuation for sale, or to receive all applicable discounts in the case of gifting the business out of one’s estate. It is important to speak with your trusted legal and financial advisors about your succession planning.