Have you considered what happens to your business if you should retire, die, or suffer a permanent disability?
Business succession planning is a series of financial and logistical plans that determine the future of a business when an owner either cannot operate it or chooses not to. Succession planning for small business owners enables you to avoid putting a strain on your family and provide assurances to your employees.
Here’s what you need to know about small business succession planning.
Business succession planning determines what happens to your business when you’re no longer at the helm. You need to identify an ideal successor and determine a selling arrangement that minimizes your costs.
There are five ways owners typically choose to transfer the ownership of their businesses, including:
Each ownership transfer option has its pros and cons. You need to weigh each option when deciding on your succession plan.
Many successful business owners pay no mind to what could happen if they can no longer operate their businesses. Failing to invest your time in family business succession planning strategies leaves you vulnerable in more ways than one.
First, it could put your employees at risk. Without a succession plan, the business could fail, leaving them out of work. An aging owner without a company succession plan creates uncertainty and anxiety within a company, degrading its ability to operate profitably.
Moreover, if your company has any existing loans or lines of credit, these could present a problem. Not many people know that creditors can call in their loans immediately upon a business owner stepping down. Your family business succession planning template must account for this.
Finally, proper business succession planning strategies minimize the tax consequences of an ownership transfer. Due to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, married couples have two years to give up to $10 million in gifts.
Leveraging the provisions of this act can lessen the tax burden on your family and the new owners if you decide on the business to continue.
When thinking about succession plans and small businesses, the goal is to benefit all involved, including the departing owner, the business, its employees, and the new owner. It should be detailed and contain step-by-step instructions for managing the transfer of ownership.
Your succession plan must include:
Staying organized and ensuring you have everything in place can be complicated. It makes sense to hire a team of experts experienced in business succession planning.
The in-depth process of a succession plan for a small business means it’s wise to enlist the help of a dedicated team of professionals.
You must cover every step, or it could cause instability within your organization after an owner steps down. Follow this guide for a basic overview of creating your plan.
An owner who has an established retirement date is relatively easy to plan for because you know when the disruption will happen. However, a disorientating departure is more challenging to prepare for.
Consider the critical roles within your organization and outline the impact of X leaving the company and how it would influence operations.
Who will step into the position?
Identify candidates early in the process and detail what makes them appropriate for that role. Do they require further training or guidance from an old mentor before they can take the reins unaided?
Make sure you have several candidates in mind. Never put all your eggs in one basket.
Remember, if you decide to promote internally, several positions could shift significantly. All these positions need the same succession plans, especially if you are an owner who also holds another working position within the company's day-to-day operations.
Succession candidates must know that they stand to inherit a position within the organization. It should be made clear who the next in line is so they’re not caught off-guard if the worst should happen.
Detail these plans as part of private meetings. Make sure your management team understands your company is in the process of business succession planning.
Do you believe your son or daughter is the right person to take over the company?
Set them up for success. Plenty of businesses have failed because of inexperienced, unskilled hands stepping into a role they were not qualified for and were unprepared.
Offer mentorship and other professional development options to deliver the knowledge and experience necessary to ensure a smooth transition.
The first time you execute a succession plan should not be when you have already left your established role. Do a trial run with your team.
If you have designated someone to take over your position, give a successor your responsibilities while you go on vacation. Give them the time to shine and put them in positions of increasing responsibility, so they can easily step into their new role when the time comes.
If you are promoting internally, acknowledge the talent gaps that may appear within your chain of command.
For example, if an owner is also currently the head of marketing, this position may be split off from a future owner. How will you fill that talent gap and all the roles within the department?
Focus your recruiting efforts toward filling these gaps as fast as possible.
Someone will inevitably need to step into your shoes one day.
Establishing a succession plan for a small business means getting the legal and financial obligations out of the way first.
You should be consulting all major stakeholders, including finance, tax, legal, and operations. Some owners may also choose to bring their investors into the mix, particularly if they have a fixed retirement date.
Planning now will enable your business to keep chugging along even when you’re gone. Think about your successor; don’t be afraid to switch up your plans if your circumstances change.
Try not to take on the role of business succession planner alone. There are so many unforeseen consequences that can arise from the sudden death of an owner or an unexpected retirement announcement, so it's a good idea to involve others to help with the process. Professionals are there to help you stay organized and ensure that you have covered all the bases.
It may be a costly service to invest in, but this one will ultimately pay dividends for the new owner moving forward.
Nobody wants to think about what will happen to their business when they are gone. Pragmatic business owners know that eventually, someone else will need to step into their shoes.
Make sure you create the right succession plan for your company and its employees with the help of a professional business succession planning team guiding you every step of the way.
Benefit from the services of Porte Brown, a group of established business experts with many years of experience in planning for the future. To learn more about our services and why we’re considered one of the top accounting firms in Chicago, contact Porte Brown now.
Get in touch today and find out how we can help you meet your objectives.