You’ve spent years building your small business—now it’s time to think about what business succession planning can and should look like. If you’re thinking of selling or simply planning for what could happen when you’re gone, writing your business succession plan is a smart step forward.
Below I’ll discuss common options to ensure your small business is taken care of for years to come.
Business Succession Planning: How it Works
A business succession plan document acts as a guide to the ownership transfer, with step-by-step instructions on what to do and how to do it. The goal of a good succession plan is to make sure that everyone has what they need to move forward positively.
A thoughtful business succession plan should include:
- A detailed timeline, with specific dates and the circumstances involved
- Any potential successors you’ve identified
- Any operating procedures, including documentation, handbooks, and training needed for whomever takes over the reigns
- Your business’ valuation and how you arrived at that figure
- How the succession will be funded
You might also have details relevant to your particular business or industry that would be helpful to include.
Who Needs a Succession Plan
Many people only think of small business succession planning as a necessary step for retirement, but the process is a smart step for any business owner to take. A successful succession plan covers the unexpected and ensures that if anything happens to you or another owner, the business is in good hands.
It’s particularly important for people who have complex operating procedures, employ a team, have repeat clients or contracts that will need to be maintained into the future, and if you have a particular successor in mind.
SEE ALSO: Selling a Business: Strategies to Achieve Philanthropic Goals
When to Create a Succession Plan
Running a small business requires a lot of time and energy, but that doesn’t mean you should delay! Many experts recommend beginning succession planning at least five years ahead of retirement, but it’s truly never too early to begin. In fact, it’s a smart idea to create a succession plan as soon as you can. That way if something happens—illness, an accident, or even death—business operations can continue smoothly.
When you’re ready to take the next step, here are some common succession plans to consider:
Selling Your Business to a Co-owner
A co-owner can be a natural choice for your successor, and can help ease the burden of the transition, particularly if it’s unexpected. This arrangement requires a buy-sell agreement, and it can help offer peace of mind to current employees and other parties.
However, it does require that a lot of cash is kept on hand. Your co-owner should be prepared to buy out your shares at any time.
Selling Your Business to a Key Employee
If you’re a sole owner, you may want to consider a key employee as your successor. Make sure they understand the ins and outs of the business, have earned respect in the workplace, and they share your vision for the business’ future.
This arrangement also requires a buy-sell agreement, either at a predetermined date or in the event of any circumstance that renders you unable to continue running your business. One potential pitfall to this agreement is money—as an employee, they may not have enough cash on hand to buy you out. However, you can consider financing a payment plan if that’s the only roadblock in your collective way.
Selling Your Business to an Heir
Keeping your business in your family is an attractive option for many business owners, though it’s not without complication. First, you need to determine who will take over, then you need to outline clear instructions for the transition of power. You can consider a buy-sell agreement if there are other potential heirs that aren’t active in the business. Once those details are sorted out, you should focus on determining what the future leadership structure will look like moving forward.
Even if you execute this plan well, often making business decisions within a family isn’t easy. However, you know your family best, so go with your gut.
SEE ALSO: Four Family Wealth Transfer Pitfalls to Avoid
Selling Your Business to an Outside Party
If there isn’t an obvious successor in the above three options, you can always consider a third party in your business succession planning. Is there a competitor you think does good work, or another entrepreneur in the area who might want to get involved?
This could be the best strategy for anyone without another option, but it can be difficult to hand over your business to a relative unknown.
Selling Shares Back to the Company
The fifth and final option is only available to a business with multiple owners. It entails the business purchasing a life insurance policy for the owners. In the event of their passing, the business uses the insurance to purchase the deceased owner’s shares, giving each remaining owner a larger portion of the business.
Small Business Succession Planning Review
Small business succession planning can be complicated, especially as it relates to the rest of your retirement planning. It’s common to feel overwhelmed by the decision-making required of the above options, but you don’t have to go it alone. At Resolute, we can work alongside you and any other professionals you’ve partnered with to ensure your business succession plan makes financial sense for your future or for your heirs. Contact us today to schedule a conversation. We look forward to hearing from you!
