Succession Planning for Small Business Owners: Everything You Need to Know

It's difficult to watch talented entrepreneurs spend lifetimes building a successful business, only to see it crumble when they pass it on to someone else. Yet the worst part is that it could've been avoided with the right business succession planning strategies.

Figuring out how your business will continue to thrive once you're out of the picture is one of the most important things you can do as a business owner. And you shouldn't wait until you're near retirement. The earlier you do it, the more options you'll have and the better your company succession plan will be.

The first step is to read on and learn everything you need to know about business succession planning. 

What is Business Succession Planning?

Business succession planning is the process of transitioning the ownership of a company once the owner retires or passes away. This ensures that the business will continue to operate with minimal disruption, despite the change of hands.

Creating a business succession plan is often seen as something that retiring owners do. However, the truth is that they're useful at any stage of the business. Think of it as an insurance policy if you're unable to manage your business long-term due to an emergency or injury. This is useful even if you don't have a specific successor in mind. That's because a succession plan should focus on the how of the transition, no matter who the successor is.

The general rule of thumb is that the more people and processes rely on you as the owner, the greater the need for business succession planning. For example, if your business has a critical process that requires your expertise, you need to think about how you can pass that knowledge on. The same is true of key business relationships that you've built.

A succession plan is most important if you plan to sell your company. Part of that plan is valuing your business — not a simple process by any means. Buyers also prefer to purchase an enterprise with a smooth transition plan from the previous owner.

The Basics of Succession Planning for Business Owners

No two companies are the same, and the same rings true with a succession plan. Small business owners should ideally create a succession plan covering a wide range of outcomes. Let's briefly discuss some of these possibilities.

The most common plan is to pass on the business to a co-founder or partner. The way this works is that at the time of your death, the remaining owners agree to buy out your shares in the company. This is outlined in a buy-sell agreement.

A less common but viable alternative is to pass ownership to an employee instead. This is preferable if you have a trusted star employee that's the most qualified to handle the company's reins.

The potential drawback of these approaches is that the remaining owners or employees should always have the funds to buy you out. One way around this is to take out life insurance that pays out the cost of buying you out at the time of your death. For employees, seller financing is also an option.

For sole owners, passing the business to an heir is also a common path. While this seems straightforward, it can get complicated when multiple heirs are involved. The potential power struggle can be a death sentence for your enterprise.

Ideally, family business succession planning strategies can help make the transition much smoother in these cases. It's important to include a leadership structure that outlines the exact responsibilities of each heir. A buy-sell agreement is also useful for heirs that want to cash out.

Succession among heirs can be complicated and risky, and you'll likely need professional help with exit planning. At the very least, rely on a family business succession planning template to lay the groundwork.

The last outcome is to sell the business to a third party. Here, the focus is on proper valuation and systematizing of your business for an easy transition. In many cases, this is the most complicated path to succession, depending on how "turnkey" your business is.

Developing a Succession Plan for Small Business

Regardless of which succession plan you choose, it involves five steps:

  1. Set Your Timeframe

Clearly outline the key dates of when your succession will take place. If you haven't decided yet, specify the scenarios (like death or disability) when your plan will trigger.

  1. Pick Your Successor

It's useful to shortlist at least three potential successors if you don't plan to sell the business. Update this regularly as well, so you'll always have the most qualified person to take over.

  1. Systematize Your Operations

Systematize and document every process in your business if you haven't already. The goal here is to have an "instruction manual" for your company, so that anyone can take over without your involvement.

  1. Value Your Business

Figuring out your company valuation is important if you're selling your business. Allow for enough time to do this, though, as valuation often takes a significant time and effort.

  1. Fund Your Plan

Finally, make sure your successors have the financial capability to take over ownership from you. You can use strategies like insurance or loans here.

Need Help with Small Business Succession Planning?

The truth is that business succession planning is a complicated process — which is why many entrepreneurs often put it off until it's too late.

The good news is that you don't need to tackle it alone. Get help from a professional agency like Porte Brown and make the process smoother with guidance from experts with over 75 years of experience.

Interested in working with one of the best accounting firms in Chicago? Contact Porte Brown today and let's get started.

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