Building an Effective Succession Plan
Having established a thriving business, you will want an effective succession plan. An effective succession plan will place your operation in the hands of trusted and competent individuals who can carry on your vision and will provide you with a stable retirement income.
According to several studies, such as from CNBC and the Financial Planning Association, around 78% of small business owners intend to sell their business at some point so that they will have a comfortable retirement, but that only around 30% have a written succession plan in place. While people wait to start their succession planning for many reasons, it is important to be proactive and plan early, rather than being reactive when circumstances change.
You will want to consult with your business advisors, including your accountant and attorney, to discuss the most effective way to achieve this goal. Here are some suggestions on how you can approach this:Your dream may have been to have your child or children take over operations. They may even be working in or have worked in the business for a time in your hope that they will gain a firm understanding and appreciation of what you have accomplished and will want to continue in your business’ management and growth.
If you do have a child whom you feel will be a sound owner or owner-manager, then begin the grooming process well before you set a target retirement date. Be sure that the control you held over certain aspects of the business can be adequately managed by your son or daughter or whomever you wish to take the reins. Most importantly, ensure that the transition is gradual, so your child has time to grow into the position, and employees and vendors have time to build their relationship with your child.
Your children, however, may not share your interest and may wish to pursue other career opportunities. You should have frank conversations with your children about the responsibilities they will face as a business owner and make sure they experience these responsibilities first hand before deciding to turn over the reigns.
Another obstacle may be if one child has an interest, while another may not. In this situation, you will have to determine how to transfer the business and reward those who have put their time into helping the business grow. We call this the “sweat equity” these children may have earned over the years.Should you have no children or none who are interested in taking over your business, you could look within your company for a trusted and competent employee. Identifying an individual within the company allows you to groom someone to run your operations and plan for an effective transfer of responsibilities, as customers, employees, and vendors may already have a solid, established relationship with such an employee.
Another option – depending on your desire to remain involved in the business and your employee’s goals – you can still structure the succession so that ownership remains with the family, but having that employee run its operations. In preparing for a new owner or management, consider the business’ current state and its long-term needs. Do you need someone with technical expertise or a manager with a sales and marketing background? You do want someone whose skills are compatible with the company’s goals and needs. If your child is to take over, you may want him or her to take classes or earn a degree in areas that your business will need to maintain stability and growth. At a minimum, at least recognize that there are areas that need to be filled by competent individuals.If you have been successful and built up considerable equity in the business, then the sale price should reflect this. Depending on the size of your business and industry, there are many different options to consider in the sale of a business. To start, you will want to build your advisory team. One common tool used in succession planning is the sale of the operating business while maintaining ownership of the real estate on which the business operates. This allows you to lease the real estate to the company and maintain a retirement income stream. There will often be an option to purchase the real estate in the future for the business. Another method is to have a note payable over several years to allow you to spread payments into the future while receiving interest on the note. This can guarantee you a steady stream of income for years to come. This is an option where you may need different financial tools to accomplish this since real property may need to be purchased and equipment may have to be upgraded or replaced. Financing may need to come from different sources. This can take time to prepare for this possibility.As your business is likely your largest asset, you will need to ensure that your personal estate planning and business succession planning are coordinated. For example, you will want to consider how your business would pass through your estate in case of the unexpected. Another consideration arises if you make lifetime gifts of business interests to some children, but not others. You may wish to leave other assets to other children in your estate plan to “even out” your gifts. In addition, if you have sold or gifted some business assets to children, but not other business assets, you will want to give those children the first option to receive business-related assets as part of their share of your estate.
In addition, you will want to ensure that you have an emergency plan in place for your business. One part is to ensure that you have a Durable Power of Attorney and other documents in place to permit your business to continue to function in case of lifetime incapacity.
Early planning for your retirement and for the succession of your business ownership and management can help you meet unforeseen problems or obstacles to achieving your goals. Meet with your attorney, accountant, and other financial experts to discuss all your options in how your business can pass to whomever you designate and continue to thrive while you bask in your retirement.