Working to maintain a successful business operation is, at a minimum, an excruciating challenge. Keeping up with the latest customer demands, making sure employees are adequately taken care of by way of benefits and wages, and remaining profitable, even in times of economic stagnation keeps the best of us on our toes every single day of the week. Business owners are masters of juggling, especially in the early stages of their company’s growth, but over time, systems are put in place and processes begin to become streamlined—the overall operation of a successful business focuses less on putting out fires and more on sustaining a revenue-producing business model. After some time, a committed team is built and nurtured, and the future of the business looks a little brighter. This is what owners strive for, and those who are dedicated reach this sometimes-lofty goal.
But what happens once you’ve put in the time and the hours and the sweat and the stress to reach the pinnacle of business operations, and you’re ready to move on? Whether that is retirement or starting another endeavor, is there a plan in place that details your wishes? Into whose hands does the business fall should something happen to you or your partners? These are all questions business owners should be asking themselves, but most are not. Business succession may be one of the most important factors of strategic planning in business, but it is usually the last on any entrepreneur’s mind. If you have yet to do any business succession planning, or think it may be time to brush off those old, dusty documents drawn up in the early years of your business, this article if for you.
First, let’s discuss what business succession planning is and what it is not.
If thought of at all, most business owners think of succession planning as the passing of the proverbial buck, either due to a planned retirement or an unexpected tragedy. At the core of this imperative planning, these aspects are true; however, business succession planning does not have to, nor does it normally involve the total loss of income or giving up control. By simple definition, succession is the action of the owner or owners of a company that seamlessly transitions ownership to another individual or group of individuals. In a perfect world, this transition means no interruption in service or operations of the company, and can be implemented in the case of incapacitation of the owner(s), retirement or death. The importance of succession planning for businesses has greatly increased since the passing of the Sarbanes-Oxley Act, with a concentrated focus on protecting the financial stability and potential value for company stakeholders. For the owner, however, strategic succession planning can mean the difference between retiring at will and a total loss of control in their business. In order to plan for succession, business owners should heed the following advice, well before the time comes to pass the torch.
#1 – Plan early and commit to the process.
Succession planning can get complicated quickly – picking out your successor(s), sharing generally emotionally charged directives based on your specific wishes, preparing legal documents and finding options for funding the succession process can seem like too much work for anyone. As business owners, keeping the business afloat is priority number one, and creating a plan to hand over the keys, as it were, to someone else five, 10 or 15 years down the road is simply not on the to-do list. However, having a longer-term vision of how your business will be run into the future and ultimately passed on to another owner can be incredibly beneficial to you and your family.
In all reality, a comprehensive succession plan can take up to a year to complete, and finding the right blend of advisors, attorneys, and potential successors can take even longer. Starting early rather than later helps owners retain the level of control they truly want once the succession starts to take place, and can save an incredible amount of capital when completed before it becomes an urgent necessity. Having family members or business partners take on the responsibility of transitioning ownership in the case of an emergency creates a chaotic scene and can cost much more than necessary. Even though the day to day operations of the business are a priority, taking a moment to widen the scope of your business vision to include succession planning should be done sooner rather than later.
#2 – Selling may not be an option.
In lieu of strategic succession planning, some business owners subscribe to the mentality that a quick sell once the decision to retire or move on takes place is the easy out, therefore making the need to develop a succession plan obsolete. Quite unfortunately, finding a buyer who is willing to deal on your terms, within your timeframe and provide you the continued level of control you need or want from your business is a unicorn in the business world. Although buyers may be out there, finding the one who values your business at the same level you do certainly will not come easy, or cheap. Instead of relying on that ominous individual or group of partners to purchase the business you worked so hard to build, creating a succession plan can be a much more concrete and advantageous route to take.
#3 – Your successor is out there, but they may need cultivation.
The first step in creating a succession plan for your business includes finding your successor(s). Whether that is a family member, a younger business partner, or an outstanding employee with serious growth potential, selecting who will take the reins upon the owner’s retirement or inability to continue running operations must be done before the financial and control aspects of the plan are determined. This is generally the most time-consuming part of the process.
Some owners think that their heirs will want to or will be capable of taking over the business, but they may have no desire or the necessary skills to do so. Alternatively, a business partner or long-term employee may seem like a viable option, but they may lack some of the specific qualities the owner wants to see passed down during the transition. Regardless of who the “right” successor is for your business, it is important to understand that getting them fully prepared to run your business may take a great deal of time and an even greater degree of commitment. Owners can look at this process as an apprenticeship of sorts – in essence, developing the skills and business prowess necessary to run the business the way the owner wants it, even after they are gone. Remember to start the process early on, and be willing to sift through a myriad of successor options.
#4 – A succession plan does not mean all or nothing.
The succession of your business does not need to be a complete transfer of ownership or the end of a portion of operational profits. When you start a succession plan earlier in the lifecycle of your business, you can create the plan that suits you the best, which could include a continuation of ownership simply in a lesser capacity. In fact, those who work with a team of professionals to structure their succession plans can create a stream of income well into the future, not only for themselves but for their heirs as well, and can keep a tight grip on the controlling share of the company until he or she passes away. Instead of passing on the torch to let someone else build your legacy, a succession plan can and is truly meant to create a collaborative relationship between owner and successor, and nurture an environment where transition can happen smoothly.
Although it is impossible to predict the future, as hard as we may try, creating a comprehensive plan that covers the bases can help tremendously. Succession in business works best when that plan is built early on, and there is ample time for the apprenticeship period to run its course for the upcoming successor. Owners can determine how they want to transition into partial or full retirement, and can avoid unnecessary costs associated with disaster planning if something were to happen to them unexpectedly without a plan in place. There is truth in the statement that good planning is good business, and it is all the more pressing when it comes to planning the eventual transition of your business.