Building Success Into Your Succession Plan
When the owner of a closely-held business is ready to retire, it’s not as simple as choosing a date and planning a party. If you want your business to continue in your absence, you need a succession plan that addresses both operational and ownership issues, as well as plenty of time to implement the plan before you exit.
The best laid succession plans are those that have been developed and thought out years in advance, rather than weeks or months when there is an urgent need to transition operations or ownership of the company due to changing circumstances such as market conditions or life events.
The right succession plan looks different for every individual business, so it’s important to spend time determining what will work best for your situation. A successful succession plan will always include attention to operational continuity as well as ownership.
Establish Operational Continuity
The first step to building a viable succession plan is to ensure continuity of the business. If a business owner is so focused on selling the business that he allows operations to slide, the product he’s trying to sell will become less valuable.
Ensure that your business will continue operating at a high level by establishing a strong team and keeping key positions in the company filled with engaged workers. In most cases, we recommend being open about your succession plan for the company with your star performers. Talk to them about your long-term plans for the company and make sure they know that a future within the company is available. Otherwise, they may assume otherwise and look for outside opportunities.
There is always a possibility that a key employee may depart the company or take an extended leave, so make an effort to ensure continuity even if that happens. For example, cross-train employees so that coworkers are able to cover for each other when necessary.
For a few years before you plan to exit the company, use employee reviews and professional development sessions to focus not only on evaluating employees’ past performance, but also to set goals and discuss forward-looking opportunities.
Determine Ownership Succession
When you have established operational continuity for your business, you’ll be better able to focus on preparing for the next owner. The first step in determining ownership succession is figuring out whether your plan will include another business owner/operator, or if an outside owner will take over with someone else managing the business.
Either option can be profitable for the existing business owner and for the business, but the right one depends on the specific situation. For example, is there a family member who is interested and able to provide a succession plan for the owner? If so, that family member might take over ownership but not management, or they might take over both ownership and management.
When there is no interested or qualified family member, there may be a key employee who could take on the role of owner, manager, or both. In the absence of a key employee who could take leadership, an outside buyer or manager might be the answer. Because the process of finding and structuring the new ownership succession takes time, companies with the most successful results start early—at least a few years before the current owner hopes to exit the business.
In addition to selecting the right future owner, the current owner must also set priorities for this transition. Those priorities may have an impact on who the right owner will be. For example, ask yourself:
- What is needed financially from the sale of the business: A one-time lump sum or a long-term income stream? Your answer to this question will affect tax planning on the potential sale income, because after tax and pre-tax sale proceeds can be very different.
- Do you need the financial proceeds from the business? If not, will you gift it to family members? If so, special planning considerations are available through gift and estate planning.
- What is the value of the business? You’ll need to consult with a professional and have a value determined for the business. Understand the factors that increase or decrease value and work on those to maximize value prior to the sale.
Avoid Common Succession Planning Mistakes
Davie Kaplan advisors have worked with a number of business owners whose succession hopes were not going as planned due to a few common mistakes – and caution avoiding these two pitfalls that have thwarted many business owners’ plans for retirement.
- Waiting too long. Planning years ahead will allow you the most flexibility in executing your preferred succession strategy. Not only can it take time to find a potential successive owner, but external market conditions can change rapidly. By planning ahead, you’ll have the flexibility to capitalize and execute when the conditions are most advantageous.
- Denying reality. It’s important to be honest with yourself about who you’re planning to take over the business, and have realistic expectations about their capabilities. Be honest about your own willingness to stay on as a mentor after the succession has been completed.
Davie Kaplan advisors have a long history of successfully working with business owners to create and implement succession plans. Drawing on their experience, creativity, and familiarity with succession planning options, they can help guide business owners through the planning process and develop a plan that will work for you.