Some owners decide to provide financing for a buyer, but sell their companies in increments so that they have time to evaluate the performance of a potential successor.
Determining what a business is actually worth is usually a critical part of succession planning. Some advisors work with professionals who specialize in valuing businesses. Potential buyers, including internal successors, tend to look more favorably upon valuations prepared by an objective third party, experts say.
Valuations are based on a number of factors, including the worth of hard assets, such as real estate and machinery, and the ongoing cash flow of a business. The latter is usually given a good deal of weight when it comes to valuing service-oriented businesses.
"You can have an owner who insists his business is worth $1 million, but his employees say they wouldn't give him $300,000," said Martin Kurtz, a certified financial planner in Moline, Illinois, and CEO of The Planning Center, in an interview last year. "It is important to get to a common denominator."
Sometimes, the valuation process is a wake-up call for business owners, according to John Barnes of Columbia, South Carolina, a certified financial planner and chief executive officer of Pendleton Street Advisors.
Some owners find that they aren't likely to net enough from the sale of their businesses to maintain their current lifestyle during retirement, even after investing the proceeds. That realization may prompt some to take steps to improve cash flow while they are still calling the shots, said Barnes.