A business cannot plan for every eventuality. An effective succession plan that outlines ownership, operational logistics, and financial structure can guide your business through retirement, disability, or death. The business succession plan serves as a guide, providing step-by-step instructions to assist in the change of ownership. It may seem unnecessary for a simple, small business to have a formal succession plan; however, who would run the day-to-day operations in your absence? Who would take over? Would the business remain viable? Creating a succession plan that is well-crafted will benefit the departing owner, the business, its employees, and the successor.
The five common ways to transfer ownership of business include:
- Co-owner – This method sells your interests or shares to a co-owner.
- Key-employee – Your business interest sells to a key employee.
- Outside Party – This outside sale is usually to an entrepreneur or other established company that wants to purchase your business.
- Company – In a business with multiple owners, you can sell your ownership interests back to the company, permitting distribution of your portion to the remaining owners.
- Heirs – You pass the ownership interests of your business to a family member(s).
Whether your business runs simple or complex processes, you will need to duplicate your subject matter expertise to the best of your ability. Process documentation can be time-consuming as conveying detailed information of what is second nature to you is difficult. Overlooking steps innate to you is common, and plan revision is necessary. Updating the plan with new business processes or clients is also crucial for running operations smoothly should a successor take over.
Key steps to take to create a comprehensive small business succession plan include:
- Timeline – Determine when the succession will occur, either on a predetermined date like retirement or in the event of disability or death.
- Choose your successor – Unless the plan is for purchase by a specific party, consider choosing at least three potential candidates. Next, create a profile of each candidate’s abilities and see how they tailor to ongoing business processes before making your selection.
- Formalize the business standard operating procedures – Known as SOPs (standard operating procedures). These step-by-step instructions of routine operations promote efficiency, uniformity of performance, and quality of output. SOPs also reduce the risks of miscommunication and failure to comply with industry regulations.
- Business valuation – There are several methods you can use when valuing your business. Frequently update your findings as valuations quickly change.
- Fund your succession plan – This “funding” is part of the path you choose to transfer the ownership of your business. Options like seller financing, loans, gifting, stock transfers, and life insurance are quite common.
A business succession plan encompasses so much information and can quickly become complicated. Many business owners prefer to utilize a third-party professional to determine the business’s value, succession plan type, and supporting documentation. A local business attorney can provide valuable information about creating your succession plan and knows of other professional organizations to assess and provide necessary input. The complexity of your business is the most significant determiner of third-party professional requirements.
There are some easily avoidable common mistakes when creating your business succession plan. The first is failing to review your plan regularly and updating the documents to reflect the changes. Changes can include company changes, employee changes, tax law updates, valuation changes, new industry developments, changing family dynamics, and so much more.
If your succession plan schedule links to your retirement plan, it is optimal to create it five years or more before your retirement date. Procrastination limits options. Early planning can minimize tax costs, permit the transfer of business assets to asset-protected entities, and ensure successful management transition, particularly in the case of family members. Optimize your outcome with early planning.
Understand that the value of many small businesses is intangible. Goodwill, a steady customer base, employee reliability, and creativity all add up to make a good business a great one. Liquidating is often unprofitable in many small businesses because of these intangible assets. Failing to create a succession plan can evaporate years of your hard work.
The time is now. The goal is to create a small business succession plan for the eventuality of your retirement, disability, and even death. Meet with your business attorney to identify the best approach for creating your small business succession plan.
When you are ready to take the next step, contact our Chicago area offices by calling 312-878-0155. We have three convenient locations to assist you.