6) Succession Planning Basics

Success is in your hands

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Every business owner will eventually retire and pass the company on to the next generation, close their business down or sell their business. If that time is soon or in the next few years, you need to improve your odds quickly.

The statistics are sobering: Only twenty percent of all small businesses for sale are actually sold and only three in 10 family-owned businesses survive the transition from founder to the next generation. In fact, only 10 per cent of SME owners have a formal plan to sell, transfer or wind down their business in the future and 38 per cent of owners have an informal, unwritten plan. More than half (52 per cent) of SME’s do not have a succession plan at all.

Too often, the owners of small and family-run businesses don’t even consider the question of who will succeed them until it’s much too late. Doing so could end up costing what took years to build: your business. Without a succession plan, a business might fall into the hands of someone ill-prepared to run it. Or you and your family might be forced to sell it for much less than it’s worth. That is, if it sells at all. If you want to capitalize on your investment, whether by selling your business and/or handing it over to the next generation, putting a succession planning strategy in place now is one of the smartest things you can do.

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What is Succession Planning?

Succession planning is a long-term process, not a one-time event. It is the process of formally determining who will take over your business and how that transition will occur. Seemingly straightforward at first, succession planning involves many factors and can be a lengthy and complex process. Minimizing transition risks involves adopting a clear and comprehensive succession plan years before you retire or sell the business. Plan for at least five years in advance. The sooner you start, the more successful your transition will be. Planning early will present you with the greatest number of options to protect your business, your family and your capital.

Benefits of a Succession Plan – “You can never get lost if you know where you are going.”

So why bother planning in advance? A succession plan helps ensure your business transition goes as smoothly as possible and minimizes costs. A poor transition can negatively impact business results and can even result in business failure. A well-designed succession plan will:

Ensure the future financial stability and value of your business and your retirement capital
Reduce the potential tax liabilities of transferring the ownership
Set a timetable for transfer of ownership to your successor, whether a family member, employee or an outside purchaser
Contribute to the growth of the business in terms of market share, profitability and size
Provide stability for your employees
Maximize your exit options and potential value to your net worth
Protect your business through good times and bad by minimizing the risks of an unforeseen event, such as death or disability
It is part a fundamental of financial security planning, and is designed to address issues such as:
- Retirement income levels needed to support your desired lifestyle
- Maximizing tax planning opportunities before its too late
- Family, business and estate financial needs in the event of disability or premature death

Succession plan development

The development of a succession plan requires the services of various professionals, typically including tax specialists, financial advisors, legal advisors and business advisors as well as internal stakeholders, such as family members, key managers, employees and successors if already chosen.

Most business owners place significant emphasis on technical components, such as tax and legal considerations when planning for succession. Other components include:

Legal transfer of business ownership
Tax implications of disposing the business
Financing of the successor
Division of future profits after the transition
Identifying long-term personal and family goals
Communication of each stakeholder’s vision for the business (employees, family, successor) and each individual’s anticipated role in the business after succession
A processes for selecting and training successor(s)

Before you begin drafting a succession plan there are a number of options to consider:

When are you going to retire?
Who’s going to manage the business when you step down?
Will you play any role in the business after you’ve retired?
How will ownership be transferred?
Will your business carry on?
Should it be sold outright?
How do you best capitalize on your capital investment?
Who will replace your role? A family member or a valued employee?
- Is he or she capable of taking on these responsibilities?
- How much do they know about the business and do they have the personality and ability to lead the company?
- Who is really best suited to head the company?

Communicate early in the process

An essential part of the succession planning is the need to openly discuss the issue of succession with family members, key managers and employees. Failure to communicate is one of the biggest obstacles to a successful succession. It can be a complex process and much depends on other people, but it starts with the owner of the business.

Should you sell?

If there is no one family member or partner capable or interested in managing the business, then you need to think about selling. You can sell to employees or to outside buyers, but to ensure the best outcome you will need to take a hard look at the current state of your business.

Analyze your business

One of the most important aspects of your succession plan begins with the analysis of your business. This means taking a close look at how and why your business works. If your business has prospered, you‘ll need to understand why so that you can ensure it will continue to do so. If your role has been critical to that prosperity, you need to consider how you can begin sharing your responsibilities with others in the company. It is also important to plan for the possibility of death or disability or the loss of a partner and how this might affect the business.

Create a thorough financial picture

Review your company’s financial statements and evaluate the current net worth of your company. This information will help set a realistic purchase price. It will also provide critical information to your successor. You will most likely need a professional appraisal. Together with your financial statements and budget projections, can provide a thorough financial picture of your company.

Get your business in order

If your business has suffered financially, if there is too much debt and poor management, now is the time to address these issues. Begin paying down debt. Look to replace or add staff and take time to find the best people to fill the positions. Do what is necessary to optimize your company’s position long before you retire or show the business to prospective buyers.

Why most business owners don’t plan their succession

Family succession planning isn’t a feasible option for every business. But if it is something you are thinking about you should start addressing succession issues now. Most people don’t like to think about significant change in their life and it can evoke powerful emotions. A common reaction is to delay and procrastinate, which is why more than half of business owners do not have a succession plan of any kind. Many also feel they are too busy managing their businesses on a daily basis, while others cannot imagine their lives doing anything else. The fact is, one way or another significant change will eventually happen for everyone. The benefits of succession planning clearly outweigh the risks of delays. We hope this article sheds some light on the value of succession planning and its benefits of addressing potential risks that could impact you and your business, even the ones you don’t anticipate.