Succession Planning for Your Business

Succession Planning for Your Business

Imagine this scenario: You’ve worked your entire life to turn what was once seen as a risky and unlikely business venture into a successful and profitable company that you are immensely proud of. Your company’s name is known far and wide for providing an excellent service or a well-crafted product, you’ve grown from one employee to 100 loyal workers, and your bottom line continues to increase year over year. You have finally reached the point in your career that you feel comfortable retiring to enjoy the fruits of your labor.

However, you realize you have absolutely no idea who should take over your company to lead it successfully into the future. What happens to your dream-turned-reality when you are no longer around to lead it?

This situation is quite common for business owners, and it can be a daunting thing to consider. This is where a proper business succession plan comes into play.

Succession planning involves a series of logistical and financial decisions about who will take over your business at certain key events in your life, such as retirement, death or disability. This usually involves a written buy-sell agreement, which provides step-by-step instructions as to No. 1, when a transfer of your business is required; No. 2, who should take over management and ownership at those key events; and No. 3, the ultimate terms of the purchase (e.g. price and payment).

Triggering Events

Most succession plans provide for a transfer of the business at death and retirement. However, the best plans also take disability and involuntary transfers (e.g. divorce or bankruptcy) into consideration.

Care should be taken to properly define the term disability. For example, exactly how long must you be disabled before ownership is transferred? What if you are lucid enough to make personal care decisions, but unable to understand every single financial aspect of your business? How disabled do you really need to be before your trusted successor steps in? These, and other questions, must not be overlooked.

Selecting a Successor

Clearly, one of the most vital parts of a proper succession plan is determining what trusted individual(s) will take over your business in the future. As a business owner, you have the option to sell your ownership interest to your fellow co-owners, family members, key employees, an outside third party or even to the company itself

The ideal successor will be business-savvy, familiar with your particular business, experienced in the industry and respected by your staff, all of which can ease the transition. It may be helpful to keep an updated list of your potential successors, including their respective strengths and your order of consideration.

Payment Terms

Outlining the value of your business and how your successor must pay for your ownership interest are essential provisions to include in a succession plan. It is advisable to utilize your certified public accountant or employ a professional business broker or valuation expert to assist in formulating an accurate value for your business.

Once a value is set, you will need to determine if your successor must pay for the entire cost in full at closing or whether they may pay for the interest over a certain time period. Often, the purchase price will be secured through a life insurance policy on the owner’s life or through a loan.

The most prudent business owner will plan for all of these decisions in advance, providing all interested parties and potential successors a timeline of when a succession should take place. Keep in mind that an exit from your business may not always be foreseeable, especially when it comes to incapacity or death. Therefore, the sooner a business owner gets a strong succession plan in place, the better. Such a plan will undoubtedly relieve stress for the owner, the successor, and the employees, and ensure that the successful business they worked so hard to develop thrives for years to come.

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