One of the most significant decisions a business owner will make is what should happen with the business upon his or her retirement. This article will touch on some of the considerations that entrepreneurs should think about when beginning to map out the future succession of their businesses.
Identifying Future Leaders
Many business owners envision their business as their legacy to be passed down to their children. However, certain questions must be asked when considering the transition of the business to family members. For instance, will your child have the experience and/or education necessary to step into the role of business owner? Will he or she have young children or other familial commitments that may impede his or her ability to take over the business? It will also be important to gauge the child’s interest in taking over your role. Further complicating matters is if more than one child is interested in and capable of carrying on the business. Having candid conversations early on with your family about your succession plan will help to minimize any potential conflict that may result while still doing what is best for the business.
Selling your business to a partner or key employee is another appealing option given that such person will already be familiar with the business and is likely invested in its future success. It may also make for a smoother transition since there will be a degree of continuity in business operations. However, potential candidates must be closely evaluated to determine whether they have the expertise and leadership skills necessary to carry on the business. Further, if you are the main point-person for clients, the transition must include integrating your successor into key client relationships early on.
If selling to a third party, you will need to evaluate whether the business will be saleable on the open market and whether it is the type of business in which a third party could be successfully transitioned. You will also need to consider how employees and clients will take to new third-party management stepping into your shoes to run the business.
Success through Succession – Practical Considerations
Regardless of whether the business will remain in the family, obtaining a business valuation will be an important part of your succession plan. To this end, a valuator should be retained to analyze the company in order to determine its fair market value.
Further, a pre-transition reorganization of the company may also be necessary. This may include the creation of additional share classes, the transferring of assets or shares among subsidiaries, or the spinoff of the business into divisions. This restructuring may occur over a period of time leading up to the succession, or just prior to the sale of the business.
You will also want to develop a contingency plan in case of your incapacitation or death prior to the implementation of the succession plan. This plan should ensure the continued survival of the business, but also that your spouse and/or children will be sufficiently provided for.
It is important to note that every succession plan will have significant legal, accounting and tax considerations that must be taken into account. Therefore, it is essential that you obtain the assistance of a trusted team of professionals to ensure your succession plan has been evaluated from all angles.
Exit Strategy – Planning for the End Game
It is also essential to develop a timeline for your exit that suits your retirement plans and sets the business up for success post-transition. The timeline should contemplate a gradual decrease of your involvement in the business. However, remaining involved in the business for a period of time post-succession as an advisor or in some other capacity may contribute significantly to the successful integration of the new management, and therefore should be factored into the timeline if necessary.
The maintenance of your standard of living post-succession is also of utmost importance. For instance, if you are reliant on your business as your main source of retirement income, you and your financial advisors should devise a plan that protects your finances upon your exit.
Finally, it is also worth turning your mind to how you will fill your time once the business has been transferred. Giving some thought to what your day-to-day activities will be like once you have left the business will help ensure your long-term happiness and sense of fulfillment.
Each business comes with its own unique set of circumstances, and there is no one-size-fits-all approach to developing a succession plan. However, beginning to think early on about the future of your business will help you devise a succession plan that makes the most sense for you, your family and the continued growth and success of your business.
First Published in Plus Delta magazine.