When you own a business, there’s plenty to keep you up at night. So it’s understandable if succession planning isn’t the first thing you think about each morning. A business succession plan spells out what happens when you’re not running your business anymore.
A well thought out succession plan includes a roadmap for an orderly exit for your business someday, but also anticipates things that could go wrong — all with an eye to keeping the operations of your business running smoothly through any transition.
While a succession plan can include a number of components, getting started is easier than it sounds. Here’s what you need to know.
How early should you start business succession planning?
It’s never too early to start business succession planning. In fact, it’s not uncommon to begin exit planning early once your new business is financially stable.
Business succession planning questions to answer
Any business succession plan should consider your particular industry, partnership situation, type of business, and preferred exit strategy. Here are some questions to ask yourself to help you figure out what kind of succession plan you need.
What are your goals and time horizons? When it comes to exiting your business, you want to be clear about your goals and time horizons. Do you want the sale proceeds to fund your retirement when you exit your business? Maybe you want to start another business? Would you be okay simply walking away?
Then you need a time horizon. Do you want to exit when you reach a certain age? Or maybe you want to leave once revenue hits a certain point. The answers to these questions will be key as you start to formulate your plan.
If you have a partner or partners, it’s important for all of you to share your answers to questions like this with each other.
Who will succeed you? If you have a business partner, he or she might want to buy you out. You can even create a buy-sell agreement in advance laying out how the business will be transferred and what the cost will be. If you have a child or other family member who wants to succeed you in the business, it’s important to know the tax implications of passing on the business and ways to reduce the tax burden.
If your successor is someone other than a partner, have you identified that person? Or perhaps you want to transfer all or part of it to your employees through a variety of stock transfer strategies that allow for a gradual change in ownership? Do you want to sell your business once it reaches a specific valuation? Your goals and exit strategy are unique to you and might change depending on the circumstances of your succession.
What's your business’ value? There are a few different ways to value your business and the one you use will depend on your industry as well as other factors.
What if something unexpected happens? What would happen to your business if you were unable to work for an extended period of time? What if you were to pass away? A good succession plan will include strategies to ensure a smooth transfer of the business if something unexpected happens.
For example, you might plan for one of your children to take over your business, but they might not be interested in doing so. In that case, you might decide to sell your business to help fund your early retirement. Having multiple contingencies in case your plan doesn’t go as expected is important.
Implementing your business succession planning
Business succession plans often have complicated legal, financial and tax implications and strategies that are used to implement your planning. For that reason, it’s important to reach out to professionals who can help you evaluate your planning from all those angles. Getting support now from experts will help you ensure your business transition goes smoothly in the future. A financial advisor can work with you and bring in other experts to help build your business succession planning.