A succession plan is something every business owner needs to prepare for the inevitable – the day you’ll transfer assets and control of your business to a family member, business partner, employee, or outside buyer.
Many business owners put off succession planning for any number of reasons – they’re busy, they don’t like thinking about falling ill or dying, or retirement seems a long way off. But failing to plan for your exit puts you and your business at significant risk.
Having a succession plan means that if life throws a curve ball and you need to step away sooner than expected, you’ll have contingency plans in place. You’ll be grateful to have made the tough decisions and laid them out, step by step, for a smooth and successful transition. So will your successors.
Because succession planning involves complex decisions that can take up to five years to complete, it’s recommended you start early. Here are a few more reasons to start planning now:
Think of a succession plan as a living document that records exactly how you want the next chapter of your business story to unfold – a tool designed to ensure one of your most valuable assets continues to thrive for many years following your departure.
Succession planning is just as beneficial for a small business as it is for a large corporation. Unfortunately, business owners who underestimate the importance of planning often regret it.
Neglecting to choose – and prepare – a qualified successor can quickly destroy a business. Putting off estate planning can lead to unnecessary stress and conflict. And failing to plan well in advance for the sale of your business can result in getting much less than your company’s actual worth.
Business vs. succession planning
Although different in nature and scope, the purpose of a business and succession plan are basically the same: to guide better decision-making that ensures a healthy, profitable, long-lasting business.
Both need to be updated on a regular basis to help you achieve your company and personal goals. And, like business planning, succession planning is an ongoing process designed to mitigate risk – one that only ends when plans are finally set in motion by your departure.
Key planning areas
An effective succession plan addresses every aspect of the business impacted by the owner’s exit, including choosing a suitable successor and leadership team.
Other key planning areas include:
Tips for success
Avoid these succession planning pitfalls
The biggest succession planning pitfall, of course, is never getting around to drafting a plan. Once you’re ready to start the process, watch out for these common missteps that can sabotage your efforts.
Before you draft a succession plan, you’ll need to spend time giving careful thought to your personal and business long-term objectives.
Ask yourselves these preliminary planning questions so you can create a succession plan that is in harmony with your personal, lifestyle, financial, retirement and business goals.
Planning activity: What will your organization look like without you?
Choosing a successor may require reshuffling some responsibilities in your company. Draft an organizational chart for your succession. If you offer a senior manager a promotion, who will take her place?
Planning activity: Addressing risks
Contingency planning ensures your business can carry on smoothly, no matter what surprises life has in store.
Brainstorm a list of risks that could impact your succession plan and how you want to address them. For each risk list:
Do you own a family business?
A major reason businesses don’t survive comes down to family dynamics. The desire to avoid conflict can pose a serious challenge for small business owners who feel caught between making the best decisions for the company and keeping the peace.
If your family business is struggling with this issue, look for an objective third-party perspective from a business consultant or financial planner. Guidance from a neutral professional whose focus is strictly the bottom line can help facilitate difficult discussions.
Will you transfer ownership or sell?
Business owners should carefully weigh the implications of transitioning the business to a family member.
Although it may be a parent’s dream to transfer ownership to a child, have an open discussion first. Your child may have other career plans. In this case, sharing the sale proceeds may ultimately be a better decision.
Communicating early and often about your plans for the family business will go a long way to avoiding tension, anxiety, and disappointment when it’s time for your succession.
Family business succession tips:
Factors such as age, desire, skill set, management experience, family dynamics and the current state of the business should all be considered when deciding how the business will be led when it’s time to exit.
– David Fabian and David Steinberg, Ernst & Young, Globe & Mail Report on Business, February 4, 2015
If you plan to sell your business, you’ll have to decide whether to sell to a family member, business partner, employee or outside buyer. Then you can start getting your business in shape for the sale.
You’ll need to determine:
It’s wise to seek the advice of a business valuator and broker as well as financial, legal and succession planning advisors to ensure the outcome of the sale meets your objectives. These professionals can help determine the right financial structure for the sale of your business, the best way to market your business and provide advice on tax and legal considerations.
Getting the best price for your business
There’s one proven way to get the best value for your business: prepare early.
It can take years to sell a business. To facilitate a quicker sale and get top dollar you’ll need to take steps early to ensure your business attracts an eager buyer.
Another excellent way to make your business appealing to a buyer is to create transferable value – in other words, ensuring your business is “turnkey.” You can do this by creating effective systems for management, sales, production and administration, so your business can function seamlessly without you. Another great tip is to create an operating manual that documents all processes in simple, easy-to-understand steps before you sell.
Will you stick around?
A buyer will likely want you to stay on board for six months to two years to help oversee the transition of the business (and, perhaps more importantly, to hold you accountable for any promises!) Will sticking around impede your next plans – to start another business, or start retirement? It’s important to determine what you are willing to do for the buyer in terms of your own transition commitment before you set out to sell the business.
You’ll also want to work with a team of planning experts who can provide a business valuation, legal advice, personal financial planning and tax-planning counsel.
Hire a dream team
Why timelines are key
It’s helpful to work toward deadlines for completing your succession plan. Some business owners break their plan into sections, setting firm dates for completion of each one.
Consider breaking your plan down into the following sections:
For each section identify:
Allow yourself a generous amount of time to seek advice and carefully weigh the right decisions. These rough guidelines can help you estimate how much time you’ll need to consider the key elements of your succession plan:
You’ll also want to include in your planning document realistic timelines for your planned succession. Set dates for these important milestones:
A business sale timetable
Although it’s tough to predict how long it may take to sell your business, these estimated timelines give an idea of what to expect.
The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company.
– Peter Drucker, Management consultant, educator and author.