It has been commented that working for oneself is great because you get to work half-days. You even get to choose which half – the first 12 hours or the second. Funny as that may seem, Baby Boomer generation business owners smile knowingly, and the thought of retirement is alluring. Logistically, however, said Boomers might find themselves in a pickle when it comes to business succession, unless they focus now on some forward-thinking.
Born between 1946 and 1964, the US Boomer generation of small business owners has been, and continues to be, a major driver of our economy (by some estimates 66 percent of all businesses with employees are Boomer owned). Sometimes referred to as the “Me Generation,” Boomers sunk their teeth deep in the American Dream, and they have become the wealthiest generation on the planet. They are also the most numerous – approximating 80 million, and they are currently celebrating their 65th birthday at the rate of about 10,000 a day!
On the heels of the Boomer generation is Generation X, numbering about 50 million, currently aged forty-something, by and large, and entering their professional peek years. Proportionately, there’s about half as many Gen Xers as there are Boomers with any comparable business acumen. With that in mind, if every Boomer-aged business owner today sought to hand the torch off to a Gen Xer, there would be a major demographic bottleneck.
As a trusts and estates attorney, without betraying any confidences, I can disclose that very few of my small business-owning clients have devoted much thought to their business succession plan prior meeting with me (only about 30% of people have done any estate planning at all). Business succession needs to be carefully crafted, preferably at least five years in advance of retirement, and there are a number of moving parts. Moreover, considering the demographics, it should be clear that failing to plan now will likely dampen future opportunity (and therefore value) translating to a less-than-optimal crossroads for retirement age business owners: sell my business for a song or continue to work 12 hours a day.
Take, for example, the business owner who has built a firm over thirty-five years of dedicated, hard work. Now that the business is profitable and rewarding for the owner, he finds that he or she wants to live a little. So he hires a young go-getter who is aggressive and ambitious, with good people skills, and a knack for generating new accounts. In time, the owner is able to play some golf and travel with their spouse, while the identified key employee is content managing the firm.
With retirement in sight, the owner crafts a business succession plan. He provides bonuses for key employees, say 10 shares of common stock, keeping 90 shares for himself. In conjunction with this, he offers his key employee the opportunity to buy his shares at the rate of 10 shares each year. In the fifth year, the owner will take a secured promissory note for the balance of the purchase, payable to him over five years and bearing an annual interest rate of 10%.
Such an arrangement would nicely supplement the owner’s income in retirement and defer income taxes. A structured buy-out will tend to maximize the long term value of the firm, which could otherwise dissipate in the absence of a plan. However, it will work only if it is implemented from a position of strength, early on, instead of waiting until the options become few.
Building a successful business takes guts and years of hard work. Business succession requires careful planning and foresight as well. Boomer generation business owners ought to consider the demographic challenges ahead, and implement a plan now, so they can secure their accustomed standard of living in retirement.