The average life expectancy of a U.S.-based Baby Boomer has extended drastically over the generation’s lifetime.

The Social Security actuarial tables indicate that a 70-year-old today could live for another 15.4 years, versus what people lived to a century ago; in 1923, life expectancy was just 56 years of age. Put another way, many professionals never lived to retire.

Craig West

It makes sense that, back then, even before the start of Social Security, there wasn’t as much need for retirement planning. Fast forward over the years, and we are constantly planning for a longer and longer retirement. 

Business owners today are faced with funding their potentially decades-long retirement. Given that their business is typically 90% of their net worth, the succession of that business is an integral part of retiring. But finding the magic number is only a piece of it. There is tremendous weight placed on the fate of employees and partners as well. 

For example, when I was an accountant 20 years ago, 99% of my clients asked the same thing: “I need to sell my business for $4 million to fund my retirement—how do I do that?” They are not asking that now—they’re saying things like:

• “How can I look after some of my people who have been with me for longer than 10 years?”
• “How can I make sure my customers are looked after?”
• “How can I make sure we continue to work with my supplier interstate—he has always supported me?” And finally,
• “How do I ensure the business continues after I retire?”

Some of your small-business clients may be asking the same things. Or, as an adviser who has built a business and is thinking about the transition into retirement, you may have some of these questions yourself.

1) Legacy-Stewardship Exit vs. Financial Harvest

It cannot be stated enough that we’re in the process of the largest generational wealth transfer in history. We can expect the passing of hundreds of trillions in total assets—including $6.8 trillion in private businesses—to the next generations over the two decades ahead.

At a high level, there is a category of Boomers who are already wealthy and don’t need to sell their business to retire—otherwise known as making a financial harvest exit. They are now looking at legacy stewardship-type exits. They feel confident in their own financial security and that the succession of their business will support income for, hopefully, generations to come.

These findings came in part from my 2022 doctoral thesis, which focused on key factors determining business exit options for small and medium enterprises. The study took place in Australia but is pertinent to any small or medium business owner considering an exit. The conceptual model below highlights the various exit options available, the key drivers of exit choice and the crossover between financial-harvest- and legacy stewardship-focused exits.

2) A New Kind of Exit Option

As you can see, there are various ways to exit a business. The next chart highlights the options available to most owners and ranks them in terms of two key outcomes: complexity and effort, as well as potential sale price value:

It’s clear that, overall, Boomers are now focused on hybrid strategies as an exit path. For example, at our consulting firm, where we advise businesses on exit and succession planning, we’ve seen a 400% increase in the take-up of employee stock ownership plans as an exit option—this is a combination strategy including both financial harvest and legacy.

3) Confronting Business Complexity

The structure of ownership, and the assets, of a private business are more complicated than ever. Multiple entities and assets that are central to the business—think buildings and equipment—make planning more complex. Some owners elect to sell the business but keep the building for future income. This complicates retirement planning—and the sale of the business—but also lends to optionality for retirement planning.

In addition, many businesses operate in multiple markets—both domestically and internationally. They employ people in other countries and import and export goods and services. This opens the business up to geopolitical risk and challenges both in operations and preparation for exit. 

4) Family Business? Not Any More

Perhaps the popularity of the HBO show “Succession” is due to the fact that many businesses owned by Baby Boomers are indeed family businesses. They’ve been owned by the same family for a long time, sometimes several generations, and often they employ several members of that family, from parents to uncles to children.

This is the backbone of America—there are literally millions of family-owned businesses. But this is rapidly changing. Members of Generation X, who are the next in line in many firms, have seen their parents work long, hard hours, suffer and sacrifice to ensure the business survives. For whatever reason, they are simply deciding they don’t want to continue the family tradition.

Unlike their parents, they don’t treat the business like their baby, but rather, as an asset, as it should be. That means, however, that this cohort is happy to build and then sell. Gen X owners are selling far more quickly than their Boomer parents sell, resulting in an early retirement. There’s actually a trend of Gen Xers retiring 10 to15 years earlier than are Boomers, who often “hold on.“

Coming to terms with how this next generation may handle their parents’ or their own business exit is a key factor in family business decisions. Ideally, the family can discuss these options openly and decide on the best path forward for all.

For business owners, preparing to retire can be both complicated and overwhelming.

In the face of longer life expectancy and shifting behaviors of the next generation, business owners should start retirement planning as early as possible. Considering the four areas of legacy/stewardship vs. financial harvest, the new exit options, the complexity of turning over one’s business and the reality of generations’ different needs is a great place to start.

Craig West is founder and chairman of Capitaliz, a digital platform for exit planners and advisers based in Sydney, Australia.