No one wants to ponder the day when their business will be out of their hands. But making a succession plan now can take the pain out of a later transfer of business ownership or control.
Not sure where to start? Ahead, we lay out the steps for proper succession planning for small businesses.
What is succession planning for small business?
In short, you decide what will happen to your firm, its leaders, employees and assets when you leave. It’s customary to put succession terms in formal written succession plan documents.
Any number of events can lead to your exit from a business. These include voluntary exits. For example, you might want to retire or start another business. Or, you may want to switch career paths.
Then, there is the less ideal scenario of a forced exit. For example, a key leader could get fired, become ill or passes away. Or, two partners who often butt heads may decide to go separate ways.
All these events can occur at any time. This is why you do succession planning before any planned or unplanned departure. The plan will get executed upon your exit from a business.
Why is succession planning for small businesses important?
Succession planning for small businesses is critical in more ways than one:
- It avoids a power vacuum. A power vacuum can occur when you leave without putting someone else in charge. A business without a leader opens itself to power struggles. Succession planning removes any doubt about who will take command.
- It maintains business continuity. Business operations can come to a halt if the leader leaves without a replacement. A business in this situation may fail to meet its commitments. Succession planning shows employees and partners that you have a plan in place.
- It affords mutual fair exit terms. There will be no disputes about the timeline or financial details of your exit. You and your beneficiaries will be on the same page about the ownership transfer.
- It may help secure your retirement. Succession planning is a good way to lay out what stock or assets if any, you will get on exit. You may be able to retire with more peace of mind this way.
What steps do I need to take for succession planning for small businesses?
Follow these steps for succession planning for small businesses:
- Choose an exit strategy. Decide whether you want to keep ownership but get new leaders, sell the business or liquidate it. Liquidating means closing a business and selling its assets. The strategy should include a timeline for the transfer of ownership and control. You don’t want to leave your successor in a lurch.
- Identify potential successors. Decide whom you might sell the business to or appoint as replacement leaders. Ask yourself whether you want to sell to a family member or an outsider. Think about whether you want to bring in outside leadership or promote from within. You will need to have a conversation with any likely successor to get his or her buy-in. Not everyone will want to be a successor. It’s helpful to have backups in mind in case the person you had in mind says “no.”
- Cultivate replacements. Decided that you want to appoint an internal replacement to lead the business? People don’t become leaders overnight. You will need to cultivate the skills of new leaders over a period of years.
- Ready financial documents. Gather financial statements to prepare for a transfer of ownership or control. You will also need valuation data. Likely successors will want to see these documents to make a decision about whether to come on board.
- Draft agreements. Put in place legal documents spelling out the who, what, when, where and how of the succession deal. Loop in a lawyer and a broker to make sure your documents are iron-clad. Have your successors sign off on them.
- Share your plan. Share your succession plan with Human Resources. Also, share it with other higher-up leaders. This way, everyone will be in the know about how to execute it when the time comes.
- Execute on the plan. The business should follow the plans in the succession plan documents when you leave. This should be a smooth process if you had a solid succession plan in place.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.