Succession Planning For Your Business
Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. One of the biggest challenges you will face as a small business owner is how best to pass on your business to the next generation. You need to make the right decisions for you and your business. This process can be made easier if you plan the succession process early – ideally when you set up the business.
Your ideal succession plan should include:
- Your key goals for the succession process.
- A timetable of the transition stages, from identifying a successor to the full transfer of responsibilities.
- Contingency plans in case the unforeseen happens, such as your intended successor declining the role
Every business needs a succession plan to ensure that operations continue, and clients don’t experience a disruption in service. If you don’t already have a succession plan in place for your small business, this is something you should put together as soon as possible.
While you may not plan to leave your business, unplanned exits do happen all the time. Generally, the closer a business owner gets to retirement age, the more urgent the need for a plan. It is very important for business owners to write a succession plan when a transfer of ownership is in sight, and it should include when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition.
We discuss 4 (Four) common ways to transfer ownership of your business below;
- Passing ownership interests to a family member (Heir):
The option of picking a heir as a successor is a popular option for business owners, especially those with children or family members working in their organization. It is regarded as an attractive option for providing for your family by handing them the reins to a successful, fully operational enterprise. Passing your business on to an heir is not without its complications though.
A few things to consider here includes determining who will take over, especially when you have more than one interested family member, providing clear instructions as regards compensation, putting into consideration a buy-sell agreement and then finally determining future leadership structure. Failing to address these issues may lead to a chaotic transition process.
- Selling Your Shares or Ownership Interests to a Co-owner
Where you founded your business with a partner or partners, you may be considering your co-owner(s) as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their estate. This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy –sell agreement ensures they’re given fair compensation, and allows the remaining co-owner(s) to maintain control of the business.
The only set back to this form of succession is the fact that this requires a lot of cash kept on-hand. This means that your co-owner(s) must be prepared to buy-out your shares, theoretically at any moment.
- Selling your business to a key employee.
In a situation where you don’t have a co-owner(s) or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. If you’re concerned about maintaining quality after your departure, then picking a key employee is generally more reliable than an outside buyer.
Just like selling to a co-owner(s), a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.
The major draw back in this option is the lack of funds as most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge.
- Selling your business to an entrepreneur outside your organization.
When there isn’t an obvious successor to take over, business owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly and ensure this is updated frequently.
One of the major drawbacks to this succession plan is the unexpected as it is nearly impossible to predict exactly what the sales process will have in store. The process of selling a business to an outside party is complex and could encounter roadblocks like: your business not being as valuable as you anticipated, lack of credible buyers, your business not being able to sell at all, and more.
In conclusion, succession plans are commonly associated with retirement; however, they serve an important function earlier in the business lifespan: If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss. As the complexity of the business and the number of people impacted by the exit grows, so does the need for a well-written succession plan.
Team 618 Bees.
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