Business Succession Planning

What every small business owner needs to know

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When it comes to having a succession plan in place for your business, there are some common misconceptions. The first being, you don’t need a plan until you get closer to retirement. The reality is that many business owners leave their business before retirement due to an unexpected event. Another misconception is that you can execute a plan within a year of retirement. In reality, many planning engagements take several years to execute.

Establishing a transition plan takes time and careful deliberation – business owners should develop a plan as soon as they start to build wealth in their business. To formulate a succession plan, start by answering five key questions:

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Are you ready?

Your business should have value in its unique products and services, customer base, and employees. Value is preserved by ensuring that trade secrets are protected, shareholder agreements are in place and key employees are retained during a transition. Further, value is maximized by strong financial performance. Preparedness also involves a contingency plan for unexpected events.

Who is your likely successor?

Ideally, you have options when it comes to your possible successor. Consider if that plan includes selling to a management team, transitioning to a family member, merging with a competitor or becoming an ESOP.

How much do you need to retire?

In other words, if you sell your ownership interest in the business, will it be enough to fulfill your personal needs now and in the future? If you find, after calculations, a gap between your personal needs and the amount of after-tax proceeds from the sale, there are strategies to close that gap. This process involves a deep dive into your personal net worth, inclusive of all assets and the value of your business interests, to determine your personal financial needs.

When would you like to exit?

Make sure you set a realistic, yet flexible timeline for yourself to leave the business. This timeline gives you and your team firm expectations and a deadline in mind.

What’s next?

Business owners spend a significant amount of time building their business, and walking away can be traumatic. To navigate this question, determine what kind of legacy you want to leave and what your ambitions are for retirement.