Small biz owners ignoring succession advice: Poll

For decades, the retirement of the baby boom generation has been an economic threat. Now fast-forward to the future and see how this demographic shift is transforming our economy. Every month, more than a quarter of a million Americans turn 65. Roughly 17 percent of this contingent has reported they are retired, up from 10 percent in 2010. A Census Bureau report reveals that by 2029, when all baby boomers turn 65 years or older, they will represent 20 percent of the U.S. population.

Succession
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A look at Main Street exemplifies the trend. According to experts, an estimated 10 million small-business owners plan to sell or close their businesses over the next 10 years as a means to fund retirement in their golden years.

Already we see the groundswell. Last year, data released by Pepperdine University found that 65 percent of the businesses sold during the first quarter were by baby boomers. This wealth transfer is expected to slowly transform the economic landscape.

Entrepreneurs who have spent a lifetime building a business in hopes of funding retirement, however, may need a reality check.

According to the FPA/CNBC Business Owner Succession Planning Survey released today, 78 percent of small-business-owner clients plan to sell their businesses to fund their retirement. The proceeds are needed to fund 60 percent to 100 percent of their retirement needs. Yet, less than 30 percent of clients actually have a written succession plan. This comes from a national survey of 182 advisors that specialize in small-business financial planning and are members of the Financial Planning Association.

The survey reported that 94 percent of financial planners have discussed developing a succession plan with clients, despite the paltry number who act on their advice. And in nearly all cases, the conversation about succession begins as early as in the start-up stage and no later than during the first significant business expansion.

"There is a huge perception gap among business owners of what it really takes to have a successful payday at the end of their career," said Dave Yeske, CFP and managing director of Yeske Buie, a San Francisco-based advisory firm. "Selling a small business is not easy; it is very difficult to monetize a closely held business." As he explained, that's because most businesses are organized more like a job than an investment. The owner does most of the work, and the profits are more like a salary than operating income. As a result, potential buyers have a hard time figuring out the true value of the company.

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Ron Tamayo, CFP and principal of Moisand Fitzgerald Tamayo in Orlando, Florida, agreed. His advisory manages $380 million in assets for wealthy families and small-business owners with companies that have annual revenues of $100,000 to $10 million. About 70 percent of his firm's clients are baby boomers.

Nearly all of his small-business clients have gotten a wake-up call as they reach retirement and realize they have no succession or exit plan in place in order to cash out for retirement. "For them, this is the biggest anxiety," he said. "They suddenly realize how hard it is to sell and market a small business if they don't have a family member or insider willing to take it over."

"Entrepreneurs who have spent a lifetime building a business in hopes of funding retirement may need a reality check."

Part of the problem is psychological, he explained. "Building a business is like nurturing and raising a kid until the time you transition them for the world. Turning over your company is a hard transition that many entrepreneurs don't want to face or think about. That's why they never address the issue until the 11th hour."

The FPA/CNBC succession planning survey reported that the only thing harder for small-business owners than emotionally letting go (33 percent) is actually finding a buyer (28 percent). FPA members report that the small-business owners they advise usually stay close to home when it comes to choosing their successors. More than half sell their businesses to employees or family members (23 percent and 31 percent, respectively.)

With so many internal sales, it is not surprising that most transactions are financed by installment sales (42 percent) and earn-out arrangements (34 percent). Employee stock ownership plans is an option for 14 percent of business owners.

Read MoreSmall-biz owners don't save enough for retirement: CNBC/FPA poll

Despite this trend, less than half of small-business owners include their families in the succession planning process, the survey revealed. Yet, there are a host of issues and challenges they face when transferring their legacy to heirs.

According to the survey, the biggest is equalizing the business owner's estate with non-employee children—a problem that 50 percent of respondents cited. Others included distributing executive control among family members and children successors (45 percent), uncertainty about family members and children's ability to run the business (42 percent), concern about employees' and customers' willingness to work with successors (31 percent) and family infighting (31 percent).

For those business owners who have not yet developed a formal succession plan, advisors like Tamayo say a good first step is to value their company's business assets. Then it is important to systemize and document business processes to determine what activities drive customer loyalty, sales and profits.

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There are key financial tools that can help. Key man disability insurance provides cash to maintain operations if the business owner gets ill, has an accident or dies. A buy/sell agreement is another great hedge; it is a binding contract between the owner and his or her co-owners that defines who can buy a departing owner's share of the business and establishes what price will be paid for that share. This agreement can consist of several clauses instructing how to handle a potential sale or buyback situation during a change in circumstance, including a divorce, financial problem or if some sort of criminal act was committed, such as embezzlement.

—By Lori Ioannou, senior editor, CNBC.com