August is What Will Be Your Legacy Month, an opportunity to think about the impact we hope to leave behind.
For entrepreneurs, legacy is not only about the people we influence or the community we serve. It is also about what happens to the business we worked so hard to build.
Will the company continue without you? Will your employees have a future there? Will the business be sold, transferred or simply closed?
These questions are becoming increasingly urgent as the United States faces what has been called the “silver tsunami”… the wave of baby boomer business owners preparing to retire. More than half of privately held businesses with employees have owners over age 55. Project Equity estimates that these owners represent approximately 2.9 million businesses employing 32 million people.
Yet many owners do not have a formal succession plan.
Whether retirement is two years away or twenty, succession planning can help you build a stronger, more valuable and more resilient company today.
Felena Hanson interviewed two Hera Hub members, Kelly Nilsson, CFP, CDFA, JD & Kelly Chewning about the key considerations every entrepreneur should address when planning for the future of their business from financial and legal planning to preparing the business and its people for a successful transition.
Here are three important areas to consider.
1. Financial Planning: Know What You Need—and What Your Business Is Worth
Many entrepreneurs assume that selling their company will fund their retirement. But they may not know what the business is worth, whether it is positioned to attract a buyer or how much they personally need from a sale.
Start by answering a few fundamental questions:
- How much income will you need after leaving the business?
- Do you want a complete exit or an ongoing advisory role?
- Would you prefer a lump-sum payment or payments over time?
- Is the company financially strong enough to operate without you?
- What would make the business more valuable to a future buyer?
A professional valuation can provide a realistic starting point. From there, focus on strengthening the financial foundation of the company.
Clean, accurate financial records are essential. So are predictable revenue, healthy profit margins, transferable contracts and a diverse customer base. A company that depends heavily on one client (or on the personal relationships of the founder) may be difficult to sell.
The goal is not simply to generate revenue. It is to build an asset that someone else can confidently operate and grow.
2. Employee Ownership: Consider the People Already Invested in Your Success
Many owners automatically imagine selling to a competitor, private investor or family member. But another option may already be inside the company: your employees.
Employee ownership can allow a founder to transition out while preserving jobs, company culture and community relationships.
There are several potential structures, including:
- An Employee Stock Ownership Plan, commonly known as an ESOP
- An Employee Ownership Trust
- A worker cooperative
- Direct ownership or equity opportunities for key employees
- A structured management or employee buyout
The National Center for Employee Ownership identifies several distinct employee ownership models, including options designed for companies with fewer than 20 employees.
An ESOP, for example, is a retirement plan that holds company shares in a trust for employees. It can own part or all of a business. However, an ESOP is only one possibility, and its complexity may make other structures more practical for smaller companies.
Employee ownership is not as simple as handing over the keys. It requires financial planning, leadership development, legal structure and employees who are prepared to take on greater responsibility.
But for the right company, it can provide the owner with a buyer, give employees an opportunity to build wealth and help the business remain locally rooted.
3. Team Development: Build a Company That Can Operate Without You
A business cannot successfully transition if every important decision, relationship and process lives inside the founder’s head.
Ask yourself: What would happen if you stepped away for 90 days?
If the answer is that everything would stop, team development needs to become part of your succession strategy.
Begin by identifying the responsibilities that currently depend on you. Document key procedures, client relationships, passwords, vendor information, financial processes and institutional knowledge.
Then begin developing people who can take ownership of those areas.
That may include:
- Cross-training employees
- Delegating meaningful decisions
- Creating clear job descriptions and accountability
- Developing emerging managers
- Establishing measurable performance expectations
- Giving future leaders exposure to financial and strategic planning
Do not wait until the final year before retirement to select and prepare a successor. Leadership transitions take time, and future leaders need opportunities to practice making decisions while the founder is still available to guide them.
Your Legacy Starts Before You Leave
Succession planning is not simply an exit strategy. It is a business-strengthening strategy.
It encourages you to improve your finances, document your systems, develop your people and reduce the company’s dependence on you. Even if you never sell, those steps will create a healthier business and give you greater freedom.
Your business legacy will not be determined only by what you created. It will also be determined by what you prepared to continue.
Connect with Felena, Kelly Nilsson, and Kelly Chewning:
Felena: https://www.linkedin.com/in/felenahanson/
Kelly Nilsson, CFP, CDFA, JD: https://www.linkedin.com/in/kellynilssoncfp/
Kelly Chewning: https://www.linkedin.com/in/kellywchewning/
