Large corporations have the leisure of falling back on a board of directors to them help look for a new president or CEO, when one retires, quits, becomes incapacitated, or unexpectedly dies. Whereas, small businesses are at a much bigger disadvantage and those that don’t have a bona-fide succession plan in place either struggle and lose money trying to remain active, go into liquidation mode, or go bankrupt and go into receivership.
In 2015, CNBC and the Financial Planning Association conducted a survey, which concluded that 78 percent of small-business owners planned on selling their own businesses so that they had the finances to be able to retire. However, of those surveyed, less than 30 percent said they hadn’t even written a succession plan, yet.
As if to not make matters worse, more than half of all small businesses are owned by people aged 50 or older. Suffice it to say, if you’re a small business owner and you haven’t written a succession plan, you need to keep reading!
Whether you’re looking to retire, add some safety measures just in case, or you plan to start up a new venture, we’ll take a look at some elements that make a good succession plan and what it should have in it.
Reason No. 1: Avoid Probate.
The number one key to planning ahead with respect to creating a succession plan is to avoid probate in the event something happens to a small business owner. “We don’t know what tomorrow will bring, which is why smart planning involves estate and succession planning,” says Denver estate planning attorney John R. Phillips of JR Phillips & Associates, P.C. “An unexpected death would inherently lead to a change in a small business’s ownership. If there’s no legal device in place to guide that ownership restructuring, the business assets get placed in probate. This can become an expensive endeavor, time consuming, and could even put operational and financial strains on the existing small business.”
Reason No. 2: Human Resources & Appointing A New Small Business Successor.
Selecting an appropriate replacement to lead a small business is also at the top of the list of reasons to make a succession plan. If the company is family run, then deciding on a successor may not be a tough choice. However, you can always strategically place family members in roles that you feel they are qualified for, and give them equity shares based on their roles so they also feel valued.
If you don’t have family involved in the operations and financial matters of your small business, you might have to find a trusted friend or adviser to name as an interim president and CEO, until a proper replacement can be found. Obviously, you’ll want to make sure the appointed successor has the same zeal and desire to make the company successful. If you don’t have a family successor, then you might have to look for a trusted and competent employee. Your succession plan might incorporate a path for the employee to buy the company over time.
Reason No. 3: Financial Planning, Training & Retirement Details.
If your small business is family run, you might have to divide the company into equity shares to be dispersed to each working family member. Whether the company remains in the family or it passes to new ownership, you can also plan how you’ll receive royalties.
As part of the planning, you should have a transition period in place so that incoming leadership or owners can get up to speed with everything involved in the operation and finances of the company. This will also involve notifying employees, clients, banks, stakeholders, and any other financiers of the changes, and find out if there are any immediate issues that need to be attended to.
If your succession plan involves selling off the company, you’ll want to get a professional valuation from a certified public accountant or legal firm as to the amount of equity built into the company. The sale price of the company needs to account for that equity. This may require setting up one or multiple options for a sale, including a lease-to-own option, or a buy-sell agreement. Just remember if you sell the company before you die, you may have to pay capital gains tax. A more complex retirement plan might involve transferring sale proceeds to a trust to avoid certain taxes.
Reason No. 4: Necessary Successor Training & Setting Up An Executable Timetable.
You’ll also want to make a robust training program to make sure your successor understands and can handle the functions of your company. Think of this as an apprenticeship and allow your successor to make some executive decisions, and in some cases you should even allow them to make mistakes, so that they can learn from them. Most experts say a successor plan should be in place approximately 15 years prior to the owner stepping down.
Finally, finding a loyal and passionate successor and planning out the transition involved will hopefully ensure your small business continues long after you are out of the picture. The earlier you get a succession plan in place, the better suited you’ll be to make adjustments and changes before passing off your small business and enjoying the fruits of your labor.
