Do you have a business succession plan in place? Here’s why this is important, how to identify potential successors, and how to create your plan.
Here's what you need to know:
- Drafting a succession plan is the first step toward a successful business transition
- There are 4 common business succession plans
- Have a plan in place before you decide to sell your business
- Include key stakeholders in succession plan decisions and decide on your minimum requirements for payment
- Work with a succession planning professional or group and create a plan for your life post-succession
According to Deloitte, only 1 in 4 private company boards has a succession plan in place. For small businesses, the number of business owners who have a documented business succession plan is even lower, with just 1/3 being prepared for an eventual transfer.
Part of the problem is that the idea of succession appears to be in the distant future. However, pushing business succession planning into the background can backfire, leaving a business owner unprepared for a sudden sell-off or merger. As a result, a small business owner can also leave money on the table.
Drafting a succession plan is the first step toward a successful transition and ensures that the business owner gets a better deal.
What is a business succession plan?
A business succession plan is more than transferring ownership to a family member, which is common in family business succession planning. In fact, there are 4 common business succession plans:
1. Passing the business to a family member
In this case, a small business owner passes their business onto a child or another family member. This is often the most attractive option for a family-owned business. However, it’s important to have a thorough discussion with the family to determine whether anyone actually wants to take it over.
Sometimes it is assumed that a potential successor will want to continue the business. But people change over time, and it’s critical to regularly access whether or not the business is their passion.
Furthermore, to ensure a successful transition, a business owner should leave clear instructions on who will take over the business, and whether other family members should require compensation.
2. Selling to a co-owner
Businesses that have 1 or more owners typically have a loose succession agreement in place in the event that 1 of the owners is unable to continue working. However, it’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.
It’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.
The main downside to this is that if a co-owner wants to buy the business, they will need a lot of cash on hand. Furthermore, if the agreement stipulates that the co-owner should buy the remaining shares upon the death of their business partner, payment can become tricky. Life insurance is often used in this case.
3. Selling to an employee
While there are many candidates for a successor, the best may come from the employee pool. A business-minded employee may be able to keep the business profitable and even expand it.
However, employees typically don’t have the funds to buy a business. In this case, they usually pay the business owner in installments over time.
4. Selling your business to another company or outside owner
You may choose to sell your business to a new individual altogether. Unlike planning for a business partner, family member, or employee to take over the business, bringing in an outside party is often unplanned and unpredictable.
For this reason, it can be helpful to rely on experienced business transition experts to help you navigate the specifics of agreements and strategy.
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5 tips for creating a business succession plan
1. Have a plan before you decide to sell your business
In addition to identifying your potential successor, you will want to define an ideal timeline and price range based on your business valuation. When will you want to retire? How long should the succession plan take?
What procedures need to be taken over? How can you streamline your process to make the transition as simple as possible?
2. Include key stakeholders in succession plan decisions
You will want to include your family, trusted friends, financial advisors, and business lawyers, as well as any other potential stakeholders such as upper management or key employees. This will not only help you plan what needs to be done, but you will also have a better idea of a timeline for when you sell.
3. Decide on your minimum requirements for payment
You should already have a general idea of how much cash you want in-hand and how you would like to be paid. Keep in mind that family members, employees, outside sources, and co-owners will all likely have a different payment plan and expectations.
4. Work with a succession planning professional or group
You will want to have a business broker or group that specializes in business transactions, especially when working with an outside buyer. This can be your CPA, a local attorney’s office, a mentor from SCORE, or even a specialist from your financial institution.
Having an expert in the field can ensure that your succession plan is solid, your exit strategy is clear, and that you don’t leave any money on the table.
5. Create a plan for your life post-succession
Finally, you need to have an idea of your life after the transition. Do you want to start another business? Where are you going to invest the money from the buyout?
A small business owner who is used to having $3 million in revenue can suddenly find themselves with $30 million in the bank. Having personal and financial support systems in place can ensure that you have a fulfilling post-succession life.
Business succession planning checklist
When putting together your business succession plans, it’s likely that you’ll have a lot of pieces to juggle. Here are some key considerations to get you started:
- In how many years do you expect to retire?
- What size will the business be when you transition?
- What will be the approximate business debt, if any?
- How will the business prevent the loss of a key employee?
- Who is involved in business decisions and will that affect the potential successor?
- How much does the business’s success depend on your skills and expertise?
- Does the business have systemized management and operations?
- What will be the approximate net worth of your business?
- Will you need a training program for your potential successor?
- Have you developed a clear estate plan?
- Have you considered how capital gains may be affected in tax planning?
- Would acquiring a product or business make your eventual sell-off more profitable?
- Are there provisions in case of bankruptcy?
- How will customers react to the new ownership?
Plan your business, automate everything else
It’s hard to make time to think about the future when you have a million tasks to complete in the present. But it’s possible to kill 2 birds with 1 stone with automation.
Using automation and templates in your business does 2 things. First, it takes some work off your plate. And second, it helps to systemize your business operations. This, in turn, makes it easier to sell your business down the road — even if you don’t have a plan in place.
To get started, check out these free templates for your HR and hiring needs: