A good succession plan will help the transfer of your business go smoothly. It helps you protect your legacy, maintain business continuity, and prepare for your future, but it is not without its share of potential issues that need to be considered. This article outlines the best strategy for your business succession.
Passing a company to the next generation may take a fair amount of business planning in advance in order to make sure it’s a smooth transition, preserves the business continuity and minimizes the tax consequences. Succession planning is the process of transferring a business or ownership stake to new owners, often family, heirs or a key employee.
Many small and mid sized businesses fall into the trap of believing that succession planning is only for large, sophisticated companies. As a result of this succession planning is often a neglected aspect of business ownership. However, that is far from the case, and succession planning, or exit planning, is an extremely valuable process regardless of the business size.
So, why should you do succession planning? Here are a few reasons:
- It helps prepare the business for unforeseen events that cause the company to lose the current leadership
- It allows you to identify the the qualifications for future leadership (you can then identify the the individuals who will take on those responsibilities)
- Creates a structure for training and development
- Maintains brand consistency during a transition period
- Helps plan for the future
The first step in business succession planning is figuring out where you want the business to go after you’re out, or as you start to step back. This isn’t always as straightforward as it may seem; often business owners simply think I want it to continue on and I’ll just retire or cash out, but their current business model may not support that. This is the time to objectively evaluate your company, how it operates, how you want to exit and what you need to do in order to make that happen.
Small business owners will find themselves at the last minute trying to put in place a succession plan and exit strategy that just isn’t realistic based on the company operations. The most common issue with small businesses in this area: the owner is the business, they run everything, hold all the knowledge and all the connections and once they step away the business basically loses all of its value and ability to carry on as a going concern. The first step would be realizing if your business operates that way. If it does, you now have a choice to make: do you want to carry on like that, and at some point just retire and shut the business down, or do you want to make some changes that will allow you to put a business succession plan in place and provide you with an exit strategy?
If the plan is for the business to continue on after current ownership steps away, it’s going to have to transition to someone. That could be a purchaser, a family member or family members, a key employee or several key employees or some combination of those. The point is that transitioning to new management and ownership will eventually be inevitable as part of the succession plan. As the owner, what you want to do is make sure you have some control over how that process and plan happens. The earlier you start thinking about succession planning, and preparing for it, the less likely you will get caught in an unexpected situation where things are out of your hands. The worst case scenario is probably the unexpected death of an owner or key executive/employee and there has never been a discussion about how to transition management.
It’s important to remember that every business succession plan looks different. All business owners don’t want to transition their company in the same way or at the same time. It may be that you want out on a certain date, or maybe you will phase yourself out, or maybe you never entirely exit but just are involved to a much lesser extent. Here are some things to consider when doing a succession plan:
- The timing of the exit or transition
- Identify the successor
- Get a solid understanding of the value of the business
- Give time to implement the succession plan
- Figure out how you’re going to communicate the move with employees, customers and other stakeholders
- Pay attention to the tax planning around this
- Make sure to have some contingencies in place, it may not go exactly as planned
You need to understand where you are currently as a company. You’ll need to evaluate the entire organization, identify any key positions, employees and gaps they may need to be filled by your exit. You may need to plan for more than just your exit. What if your entire executive team has been with you from the beginning and are probably on the way out too, or your most successful sales person decides to leave, or the manager of your warehouse operations retires? This is the opportunity to address all the key positions and how you will handle an absence in one of those.
Figure out how to protect the company, the organization and the knowledge or knowhow that allows the business to continue being productive. While every business is likely to have some superstars and key employees, you want to systematize the knowledge and processes around jobs, especially the most important ones, so you’ll be able to survive your departure and the departure of an employee. You want to avoid any setbacks or pitfalls whenever possible.
The best way to approach the planning process is to give yourself a lot of time to figure out what you’re going to do, what the company will look like when you’re gone and to implement the plan. We’re talking about a year or more. Get all the necessary information, internal parties, advisors and third parties involved sooner rather than later, this is a process and will require a lot of planning and special expertise.
Have questions about business succession planning, or managing business risks in general? Contact us for a free consultation.