Business succession has become a top three priority for business owners, according to the 2022 Principal® Business Owner Insights (more than 1,000 businesses polled in January 2022). Succession planning has never ranked so high since the survey began in 2008.
Yet 45% of these business owners, who lead small and midsize businesses with fewer than 500 employees, lack a succession plan. And 26% of those who do have a plan haven’t reviewed it in more than two years.
An effective succession plan, informed by the help of a trusted financial professional, can lend greater clarity, financial security, and increased peace of mind—even if it can’t anticipate everything about your eventual ownership transition.
“We all have great ideas of how we want our succession to go, but there are usually a few curves and twists along the way,” says Mark West, national vice president of business solutions for Principal®.
Explore these top business succession strategies, as ranked by business owners nationwide in the survey, which offer relative strengths and risks that depend on your business size, ownership structure, industry, timeline, and many other factors.
Top 6 business succession strategies
1. Give to family members.
What it is: Family legacy guides business decisions, not vice versa.
| Pros | Cons |
|---|---|
The next generation of ownership is set up favorably with the health of the business as priority.
Leadership continuity and business branding may remain strong. |
Could trigger a tax burden if you transfer all at once.
May upset the family dynamic among heirs not in the business.
Consider the potential negative impact to your own retirement (without income from the business). |
2. Liquidate.
What it is: Technically not a succession—a cessation. The business evaporates.
| Pros | Cons |
|---|---|
|
You may be able to clear debts, exit the business, and move on—take the cash and walk away.
No need to find and prepare a successor. |
No fun if you’re insolvent and forced to liquidate assets.
Generally, you sell the business at a steep discount.
Customers |
3. Sell to an outside entity.
What it is: You look outside your business for a successor—perhaps a competitor in your industry or even an entirely unrelated business or investor.
| Pros | Cons |
|---|---|
|
Potential to sell at a higher price and get a lump-sum payout.
May avoid emotional entanglements with competing family members. |
Must take time to research the buyer.
May be asked to stay and help run the business longer than you’d like.
For some, this may be emotionally harder than selling to family; you may have less lingering influence over your legacy than you’d like. |
4. Sell to business partner(s).
What it is: The close ties within your business—whether current partners or key employees ready to become owners—provide a bridge to the next generation of ownership.
| Pros | Cons |
|---|---|
|
The successor may know the business well and lead a more seamless transition. |
Without a good buy-sell agreement in place, partner relations may break down long before succession.
Key employees may struggle to build up enough equity and may need to buy the business in installments—extending your timeline and/or limiting your options. |
5. Sell to family members.
What it is: A balance—often tricky—of family and business.
| Pros | Cons |
|---|---|
|
Can help the owner avoid risking too much personal financial security because of family sentiment, had the business been gifted. |
Selling the business in installments to ease the burden on the buyer may put your financial security at greater risk if the business suffers. |
6. Sell to employees through ESOP.
What it is: An employee stock ownership plan (ESOP) lets employees earn shares and become vested over time to build long-term financial security.
| Pros | Cons |
|---|---|
|
Succession is broadly shared among employees, aiding retention.
Employees are directly aligned with business success.
ESOP may boost business branding and marketing—and customer support. |
May take extra time and energy to build a strong management team to run the ESOP.
Sale price is generally fair market value as determined by an expert—not maximum value.
Smaller businesses may not be able to devote funds to ESOP vs. reinvesting in the business. |
What's next?
- Now personalize these succession strategies to your business. Try the Principal® Business Needs Assessment to help evaluate the financial health of your business, map out a succession plan, and work toward solid goals.