Is a business just about selling products and making money? I don’t think so. A small business is more like a dream, an emotion.
As small business owners, you are responsible for your business growth. You worked every day, and night to make your business stand out in the market. But have you ever thought, what would happen to your business when you won’t be there? Will it be sold? Or will someone take over?
If all these thoughts make you concerned then let me introduce you to Small Business Succession Planning.
Business Succession Planning
Business succession planning is the procedure where a business owner develops a plan to hand over their ownership to someone else to run the business after they retire.
In other words, Business Succession is the transition of shifting your company buy-sell agreement, financial reports, and tax papers to your key partners after your retirement.
Developing a business succession is like putting a safe exit plan in place. With this, you can go to your retirement in peace.
How does a Business Succession Plan Work?
The document of a Business Succession Plan contains all the instructions to guide small business owners so they can change their ownership.
Moreover, it talks about company ownership, management, financial planning, purchase and selling documents along with reports of insurance, tax, sale, and capital. These are the basics, but most importantly you need a business partner/successor and a standard operating procedure to get things done.
Will you sell your business? Or transfer it to someone else? How will your business valuation work? Everything will be stated in the document.
Should you create a Business Succession Plan?
Business owners need to understand that a business succession plan is not for everyone. It is solely related to retirement. So if anything unexpected ever happens to a business owner then a succession plan can help the company to reduce problems.
Also, if small business owners like you are ready to retire or worried about a sudden death then it’s better to compose a succession plan. Don’t forget to keep your insurance paper and business tax paper close.
Anyways, if your business is at its growth stage where you have a lot of employees and a lot of clients then you should develop a succession plan. Because there needs to be a successor who will take care of things when you’re not there.
When should you create it?
Every emerging business must have a succession plan so that its operations can remain stable. Business owners need to understand that a succession plan isn’t a waste of time but an investment. Take Coca-Cola for example. Its original owner died years ago, yet its operations continued and today it is one of the most valued companies around the globe.
You don’t need to set up a succession plan at the very beginning of your business. Develop one only if you get too close to your retirement age or if your business is at its growth stage or if you want to put your business for sale. Or else you don’t need a succession plan.
Importance of Small Business Succession Planning
In one line, Business Succession Planning is important to determine a stable transition within the business. This benefits both employees and customers.
With succession plans, you can ensure the long-term growth of your business, maintain company finance, choose a key successor who shares common interests, manage legal papers and prepare yourself for any unexpected event to happen.
Besides, I believe business owners need to take time off and think about your personal life and your future after exit.
Different Types of Succession Plans
A succession plan is not just about the transfer of your ownership, it is more than that. Let’s go through the key points to identify the differences.
1. Selling the Business to an Outsider
If you feel that you don’t have any potential key partner within your company then you can sell your business to a 3rd party. It could be a competitor or an energetic entrepreneur. But before you do so, do determine your business value.
I would suggest you look for a good number of investors who are willing to be an owner of your business. If they share a common interest like you then they will value your business. Discuss amongst yourself and come to a successful buy-sell agreement to make a sale.
But wait, there is a small issue. Most of the time the outsider doesn’t like to maintain the business transition the way you would want them to. They would set up their own planning and address new structures to the business. This could trigger a concerning event for an owner like you.
So whatever you do, make sure it benefits both you and the successor.
2. Selling the Business to a Co-Founder
Planning to transfer the ownership to your co-founder? I think this is an excellent idea. It’s always safe to start a business with a team, this way when you retire you can hand over your business to them. They will not only maintain a smooth transition but also work for the future of the business.
A buy-sell agreement with your cofounder can be a future-fit solution that can easily solve a lot of problems if the owner ever faces sudden death.
Before you select your co-founder as a key partner make sure they have enough cash to buy your shares, or you can gather your life insurance papers to cool their pressure.
3. Selling the Business to an Employee
Not all business owners have a co-founder in their company. In that case, the owner can address his concern towards one of their key employees. Pick an employee who worked closely with you and was involved in the core management work. Because they’ll know more about business planning better than anyone.
If you don’t have a key employee then check the organizational chart, which will give you tips and measurements to identify valuable employees.
Similar to a co-founder, the employee will have to sign a buy-sell agreement including the legal price of the company. Just make sure your employee has enough capital to mitigate the price.
4. Selling the company shares back to the company
Some businesses have multiple owners, they need to design a different type of succession plan. Here you can buy shares of your company before handing over the ownership to a successor.
To do that the company needs to buy life insurance that’ll include all the owner’s names. This way if an owner dies, the business will use his/her life insurance to buy business interest from the owner’s estate.
If the business stays within its owners then the transition will stay active without you worrying.
The Business Succession Planning Checklist
Here I have created a small checklist for you to set up a business succession plan. By maintaining this checklist, small business owners can successfully compile their succession planning process.
As for you, make sure to maintain the transition of the checklist to avoid disruption.
✅ List down the goal of your company and your personal finance.
✅ Create a team or a list of successors.
✅ Set up a succession timeline. (Mandatory for small businesses)
✅ Enlist potential exit options and address their advantages and flaws.
✅ Set up a Standard Operating Procedure
✅ Measure the value of your business
✅ Compose a handbook consisting of personal, financial, and management information of the entire company.
✅ Analysis of financial documents including company life insurance and tax.
Small Business Succession Planning Process
Now let’s get down to a detailed brief on how you can create a business succession plan for your small business.
1. Set a Succession Goal
Do you really need a business succession plan? If yes then what is your goal? When you set a succession goal you are developing your small business to overcome future challenges.
Small businesses often forget to set up a succession goal. This keeps the transition smooth and employees will face no disruption in working. Decide if you want a fast growth of the company or a steadier growth of your business.
If you want fast growth even after handing over your ownership, you’ll need to plan a large payday because without a higher pay employees won’t work hard enough.
If you want steadier growth for your company then you can surf along the waves without any worries.
For example, real estate businesses focus on steadier growth and are keen on developing a strong succession plan. This way the real estate business keeps growing year after year. Because all of their successors know what they are aiming at.
Every global company was a small business at the beginning. If you want to dream big then go set a succession goal so that your next successor can hold the strings from where you left.
2. Align your goal with a Successor
If you have a good number of potential successors in your hand then that’s good news. Now all you need to see is which successor can see through your vision.
As the owner of your business, you already have goals for your business. Before you hand over your ownership to someone else you need to see if the successor thinks the way you do or not.
If you choose the wrong successor, after your retirement you’ll have to sit back and watch your employees leaving your company, your sales coming down and customers shifting their priorities. Who would want this? No one.
You can do two things, select a team that will run the company after you or a single successor. But before you do so make sure they know everything about the company management system or else they can’t maintain the transition when you’re ready to retire.
3. Regulate a Business Valuation
Before you sell or hand over the business to someone else you need to conduct a business valuation. This way you will have a complete report of company financials and management.
Company yearly reports, balance sheets, total company value, total expenses, etc. Everything will be involved in the valuation document. This way it will be easier for investors or successors to understand the management.
4. Prepare Agreements
You have a goal, you have your successor and you know how much your business is worth. Now all you need to do is prepare the agreements.
Legal agreements are important for all business owners to seal the deal. The owner just needs to create a buy-sell agreement with the successor. This agreement will include the number of company shares, ownership handover details, required capital, and purchase signature.
This way you can retire in peace and the successor can transition into ownership.
5. Maintain Proper Communication
Small businesses often proceed with a succession without anyone knowing what’s going on. This creates a lot of rumors within the businesses and the management team goes crazy.
If you’re preparing a business succession plan, just tell it to everyone else within your community. You wouldn’t want rumors to spread regarding your company ownership. Most importantly, your management team needs to know who’s going to be in charge of the company to prepare accordingly.
6. Keep everything Documented
Throughout the whole succession process, there will be a lot of papers that’ll change hands, a good number of meetings will take place. You’ll find it very hard to keep track of everything.
Here are a few tips. Whatever you do, don’t rely on someone’s words. Keep everything documented with everyone’s signature on it, even the meeting minutes. Ask your management team to do the same as well. Since there will be a purchase going on over a high range of capital someone could join in to crash the succession due to personal conflict.
It’s always better to be on the safe side. If you can properly maintain the documents no disruption will come to you.
Planning to keep everything within your Family?
The best thing about business succession planning is that you can always decide to keep the business within your family. Just pass the business to one of your family members. Thousands of businesses have done this so you can do it too.
Businesses that operate within family members are called family-owned businesses. When all the family members are aware of the business any family member can hold on to the transition and manage the management after the owner’s retirement.
If you’re also planning to transition one of your family members to become the next owner, follow the below process.
Family Business Succession Planning Process
Developing a family business plan isn’t that hard. It is 80% similar to the normal succession planning process. Then again let’s go through the system for a better understanding, shall we?
1. Pick an eligible person
You can’t call your business family-owned unless they and you want the same future for your business. Before you address someone from your family to take on your business make sure they are capable enough to do it.
To whom are you going to pass the company to? Will it be your sibling? Or will it be your children? Do they have enough knowledge about the market? Are they skilled enough to operate the management team? Can they maintain the transition after you leave?
2. Identify a group of Successors
Since the business is going to stay within the family you can list a group of people who can take over after you retire. You can give them roles and add them to the higher management team.
The best part is that you can train your grandkids to become successful businessmen like you from their childhood. But wait, if someone isn’t interested to be a part of your business don’t force them. Everyone will have a choice.
3. Find an Advisor
Why do you need an advisor? Because you would want someone to be your personal alarm clock to remind you about tax, legal issues, and capital valuation.
You can select a family member as an advisor. But if you feel that a single family member is not enough then select a few more. Or if you think that they are not capable enough then hire someone from outside. Being an advisor is not a kid’s play.
4. Create and Review the Succession Plan
Now all you need to do is create the succession plan. Bring in all the important papers, and put your’s and your family member’s signature on the bottom line. Now your family business succession plan is complete.
Make sure you attach the financial documents including your business valuation report. Also, attach contingency plans and legal documents to maintain transition. Then make a full copy of the succession plan and review it through three to four people.
Preparing a business succession plan isn’t that easy, even if it’s within your family. You need to be very careful as you fill out the documents. The transition of your business depends on those documents so you need to be careful as you make the decisions.