You need a succession plan if you want your business to Outlast You. Succession planning isn’t just for someone older who’s got retirement on their mind. Every business owner should have a succession plan because you don’t know when you’ll leave your business, whether that departure is by choice or not. If your business might be forced to close in your absence and want to prevent that, you need a succession plan.
Your dream may be to run your business until the point your children can take over, or you sell it for a tidy sum to fund your retirement. Dreams can come true, but they often don’t. Business owners are like everyone else. They may be severely injured in an accident, suffer a debilitating disease or something unexpected may happen so you can’t, or don’t want to, run your business any longer.
With a succession plan, you may be able to:
- Easily transfer ownership.
- Maintain your standard of living in retirement.
- Provide for your heirs.
- Prepare your business to continue to operate when you’re no longer there.
Could your business be where it is today without the plans you made? It also needs a plan for what will happen without you.
What are My Options?
No two businesses are alike. The plan must cover you and your business’ unique situation. Here are some things to consider:
- Should a family member take over? Is someone willing and able to do the job? Will choosing that person disrupt your family because others hoped to be selected? Will you keep, sell, or split your ownership with the person next in line? How would this be paid for?
- Do you own the business with others? If so, do you want to sell your interest to them? You should have a buy-sell agreement in place if one of you wants to, or must, leave the business. Without such an agreement, others’ interests may be split with a spouse due to a divorce or inherited through probate after their death. Co-owners can buy life insurance on each other, so proceeds could pay for their share of the business, which would transfer to surviving co-owners.
- Is there a key employee interested in buying your business if you’re no longer involved? If there are no co-owners, this may be a way your company stays “in the family.” A business loan could pay the purchase of your interest, or you could finance it. The employee would get a minority share of ownership upfront and pay you for the rest over time.
- Would you want to sell to an outside party? This is the way to go if the other options aren’t a good fit. The price will depend on how well the business performs, your debt level, and how the economy is doing. Finding the right buyer may or may not be difficult, depending on your asking price and the demand for your business. If you’re facing a health emergency or for some other reason need to exit quickly, you may need to cut your price.
You may have other options depending on your goals and your business’ circumstances.
Should I Conduct a Business Valuation?
No matter your plans, get a business valuation and don’t rely on what you think it’s worth. After you get a fair and independent opinion, you’re better positioned to plan your retirement, value shares in your company, and purchase adequate insurance. It will also be helpful if you sell your business or need a loan. If the valuation isn’t as high as you hoped, find out what’s holding you back, and address the issues while you still can.
How Do I Prepare for the Ownership Transition?
No matter which option’s right for you, going from one owner to another may be a vulnerable time. While engaged in this process, your business must keep your customers happy and deal with competitors telling them it’s a good time to switch to their products or services.
Here are some things for your transition ‘to do’ list:
- Identify weaknesses in your business and remedy them. Your business valuation and your knowledge of your operations will help you take action to maximize your business’ value. Set financial and operational goals along your expected departure timeline. Hold yourself and others accountable for meeting them.
- Document your processes. Create operations and employee manuals. This written information will help your successor keep the business going until they decide what, if anything, they want to change.
- If an outside party or a key employee will take over, start training them. Determine what they need to know, how, and when they’ll learn it. Part of this can be delegating more of what you do. They develop “on the job” experience while you’ll still there for advice and could correct mistakes if they happen.
- Decide if incentives will be needed to keep essential employees onboard during the transition and afterward. If you do, what should they be, and how valuable should they be? They could be bonuses, stock options, or partial ownership.
- Prepare the necessary legal and financial tools. You may need to change the legal entity owning your business. There may be a sales agreement, contracts, and insurance policies to buy. How you leave your business may have greater or lesser tax implications.
- Regularly review your plan and update when necessary. Your key employee may leave, family members may gain or lose interest in your business, and you may want to exit your company earlier or later than you did when the plan was first written. How should your plans change if your business is worth much less or more than when your valuation was done?
Succession planning is a critical but often overlooked part of owning a business. We’ve helped many companies go through this process and can tell you how different approaches worked and didn’t work for them. If you have questions about creating a succession plan, changing one, or needing legal help with buying, selling, or transitioning away from a business, contact Focus Law at (714) 415-2007 or reach us by clicking here.