Monthly Archives: March 2019

Succession Planning…A Must for Business Owners

“If you fail to plan, you are planning to fail.” -Benjamin Franklin

People become business owners for a variety of reasons. The driving force behind most business owners is the belief that they can do things better than anyone else, the allure of being their own “boss,” and the ability to be the master of their own destiny and build their own wealth.

The natural evolution of being a business owner begins the minute you start or buy the business. The life cycle continues as you design, build and grow your business into something special…and profitable. However, at some point, the sooner the better, you must begin planning for an exit strategy, or a succession plan, to ensure the kind of legacy you want to leave behind with your business.

Most business owners don’t prepare for their exit. In fact, a recent trust survey revealed that only approximately 40 percent of small business owners have a succession plan in place. The majority of those without a plan said that they enjoy what they do so much that they can’t imagine a transition of ownership, while the remainder of the business owners surveyed said they were too busy to plan or felt that succession is still too far away in the future to begin thinking about it. But, life happens fast and unexpected life events can happen at any age. So, if you own your own business and you don’t have your exit strategy…succession plan in place, it’s time to get started!

How to build your succession plan

First, you must ask yourself a few important questions. Do you plan on selling your business to a third party at a certain price, do you want your business to live on through one or more or your children or do you see yourself selling to a third party yet maintaining a level of involvement in the company? This decision is key to how you will build your succession plan.

Once you’ve determined this, begin by taking the following steps:

1. Gather financial documents – A smooth transition of ownership begins with organizing the company’s financial documents like valuation data, inventory and up-to-date financial reports (audited P&L and Balance Sheet Statements). Buyers and lenders will want to review these records to determine how the business has performed historically before entertaining a deal. Organizing and consolidating your financial documents also protects your business if an unexpected circumstance forces you to sell or a family member is left handling a transition.

2. Establish a buy-sell agreement – A buy-sell agreement is a legally binding contract that allocates portions of the business in the event an owner passes away, becomes seriously ill or is contemplating selling his or her share of the business. This agreement contains information about the business like its sale price, the value of each owner’s share and stipulations such as who can or can’t buy the business. A buy-sell agreement also reduces the risk of conflicts among family members or partners who may not have the company’s best interest at heart.

3. Begin identifying your potential successor(s) – As a successful business owner, you’ve built your company from the ground up…it’s your baby…your pride and joy. Consequently, you want the business to continue to flourish when you are no longer at the helm. For this to happen, you must select the right person. Finding the right person, however, takes time. Whether you choose a family member or an outsider to take over your business, you will need to train them to run the business. By having an active role in the training process, you’re afforded the opportunity to develop and evaluate the critical skills and business traits of your potential successor to help ensure the long-term success of the business.

4. Establish a timeline – Set a timetable to determine when the control of your company will be turned over to your successor. Ease your successor into the transition, allowing him or her to make decisions, as well as mistakes, during this phase.

5. Execute your succession plan – If you’ve done your homework…the proper preparations, this should be as simple as handing over the keys. But, before you step aside make sure all your account information is organized and readily available to the new owner. As part of an exit strategy, you should have all sensitive login credentials for email servers, business software, IT systems, etc. organized and in a secure place to pass on to the new owner(s) or you should assist them with setting up new ones before you leave.

A well-thought-out succession plan is essential for small businesses and partnerships. Planning early and revisiting the plan as conditions change are the keys to a successful transition of ownership when that day arrives. With many options available to you and your business, you’ll greatly benefit from the counsel of a business and commercial law attorney. He or she will be an invaluable resource in helping you design a plan that is right for your business as well as minimize your business’s tax burden.

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