This guide outlines the strategies to implement succession planning that will ensure transition doesn’t damage the business.
Before the pandemic, a mere 25-30% of business owners had a comprehensive succession plan. Consequently, many organizations experienced chaotic transitions, production pauses, and permanent closures. Now, many professionals are reconsidering their approach in an effort to avoid such chaos and confusion. Whether you plan to retire, transition to a new career, or stay with your company until the day you die, having succession planning in place can help you do it.
How to manage succession planning
Luckily, learning how to manage succession planning as a business owner is easier than it sounds. Enjoy a brighter outlook, greater peace of mind, and renewed vision by preparing your company for a successful future. Use the tips below to create and manage your own plan so your business continues to thrive long after you’re gone.
1. Adopt a Big-Picture Mentality
The first step in developing succession planning is to adopt a big-picture mentality. Too many business owners focus on the here and now and how to achieve success in the short term. They’re under an increasing amount of pressure to bounce back after the pandemic and take their business to new heights, so their narrow-mindedness is understandable given the circumstances.
However, looking further into the future and creating long-term goals is just as important. Whether you plan to leave the business 10 years from now or 50, you must have an idea of what you want the transition to look like.
Discuss your thoughts with close family members who might have an interest in taking the reins when the time is right. Put pen to paper and list both short- and long-term goals of succession planning. Then, you can move on to reviewing your options and creating a solid succession plan.
2. Review All Your Options
There are several scenarios in which a business can change ownership, and it’s up to you to develop succession planning that suits your particular situation. Generally speaking, there are five common types of small business succession plans to choose from.
3. Selling to a Co-owner
Many partnerships draft a mutual agreement outlining the transfer of power to the remaining owner in the event of one’s untimely death or disability. In this case, a buy-sell contract that includes life insurance policy stipulations will ensure fair compensation in succession planning.
4. Transferring to an Heir
Maybe you have a son, daughter, or grandchild who’s expressed interest in — or is currently a part of — your organization. Provide for your family in succession planning by making one of them your successor. Reference current contributions and responsibilities from potential heirs to choose the best person for the job.
5. Selling to an Employee
If you don’t have a co-owner or family member who’s willing to run the company in your absence, consider selling it to a dedicated and trusted employee. This succession planning option is also ideal if you’re worried about maintaining quality after your departure and don’t want to sell to an outside buyer.
6. Selling to an Outside Party
Business owners without an obvious successor will often look to the community for one in succession planning. Is there an entrepreneur or even a competitor who’s interested in taking over? This option is easiest for turnkey operations that don’t require complete rebranding and reorganization when changing hands.
7. Selling Shares Back to the Company
Some businesses have multiple owners who together form an entity purchase plan or stock redemption plan. This option allows surviving owners to buy and redistribute your share of the company whenever you decide to leave.
Make a list of potential successors and outline their strengths and weaknesses to determine which succession planning option is best for you and your company.
8. Conduct a Business Valuation
Regardless of whether you plan to sell your company, conducting a business valuation is a good idea in succession planning. This step will help you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance. Valuations and reevaluations can also make it easier to attract potential investors, find new buyers, and get loans.
Hire an experienced expert to conduct a comprehensive and accurate valuation based on revenue, earning potential, assets, debts, market value, and other important factors.
9. Formalize Standard Operating Procedures
How do you want your successor to run your business? If you leave them without instructions, they’ll have to develop new policies and procedures on their own, which could result in disorganization, employee turnover, and the ultimate demise of your company.
If your current systems work well, formalize standard operating procedures in an employee handbook or series of documents. Include training documentation, progression paths, and details regarding client and employee policies. Provide your successor with this paperwork so they can pick up where you left off and ensure a seamless succession planning transition.
10. Use Tax-Advantaged Strategies
Having a succession plan can also help your loved ones navigate probate court and offset the impact of estate taxes and other costs. It can also reduce your risk of losing wealth due to taxes.
Use tax-advantaged succession planning strategies like a family limited partnership or a buy-sell arrangement to ensure a smooth transfer of power and wealth. Being proactive on this front can also help you protect your assets and facilitate charitable giving, both now and later.
Reviewing Your Succession Planning
Once you understand succession planning for business owners, you can formulate a comprehensive plan that suits your current situation. More importantly, you can conduct an annual review to keep it up to date.
Conclusion
Over the years, key employees will likely leave, family members may lose interest, and your competition will grow. Your career and retirement goals may change, too, so reflect on your succession planning regularly and make any necessary changes along the way. If you do everything right, you’ll establish a legacy for your kids and grandchildren — and the business — and guarantee consistent growth long after you’re gone.
Often, the succession process of companies arises from the interest of the entrepreneur to retire or move away from business, maintaining his livelihood, wife or husband and other dependents.
However, several entrepreneurs are unaware of financial concepts about the valuation of their enterprise, which makes it difficult to establish the true value of the company and the basic parameters related to the costs and profits of the business, making it difficult to define how the company will distribute the profits to the withdrawing partner.
The organization of financial data makes it possible to carry out previous analyses, comparisons and projections, in short, medium and long-term scenarios, as well as being able, more accurately, to assist the entrepreneur as to the exact moment to withdraw from the management of the company.
It is important to emphasize that establishing profitability criteria based on financial data is not only important for entrepreneurs who are currently in business management, but also for succession planning of a company, since they can equip successors with real data on the activity of the business, facilitating the understanding of the decisions made that lead the business to success, as well as preparing successors to face the difficulties that may arise.
