Often, an entrepreneur is too excited about their business idea at the beginning of their journey that they forget to plan for winding down or selling their business. But failure to consider an exit strategy for a startup often creates tension, even in family-owned businesses or businesses between friends. The small business suffers when the owner or a senior partner retires, becomes incapacitated, or dies.
Planning early, writing business plans, and basing decisions on business needs are the keys to a successful handoff or succession planning. Hiring an experienced small-business attorney to draft your succession plan is the best way to keep your small business running smoothly. This article will help you understand why succession planning is so important so you don't delay putting it off any longer.
What Is a Succession Plan?
This predetermined plan outlines what happens if the owner or a high-level partner dies or can no longer serve in their critical role. You can find business plan templates, though there are items every written business plan needs:
- Executive summary in one or two pages lays out the snapshot of your business, like location, mission, market, and company description.
- Marketing plan and marketing strategy for the new owner or director. This includes print advertising, press releases, and social media announcement timelines.
- Market analysis, target market, and business valuation at the time of the plan. Keep these on file each time you update the plan.
- Financial plan and reference to the most recent financial statements and records. Records include financial projections, balance sheets, cash flow statements, and profit and loss. This helps lenders and investors feel more at ease during an often unexpected transition.
- Mission statements help keep your existing business's ideals intact with the new owner or change in senior partners.
- Operations plan that details the business's day-to-day operations for a specific time period. This includes positions responsible for duties, employees, and management.
- Competitive analysis details competitors in your market and your similarities and differences. You may know it as a SWOT analysis for strengths, weaknesses, opportunities, and threats.
- Sales strategies
The type of business plan you choose depends on your needs. The U.S. Small Business Administration (SBA) has free templates for you to review.
Why Your Small Business Plan Needs a Succession Strategy
Your business structure, goals, and type of business dictate how extensive your succession plans must be. If you are a 10-person family-owned company, your needs may differ from those of a publicly traded Fortune 500 company. However, no matter what your existing business is, the reasons for a small-business owner to have a plan are the same.
Below are some common reasons for business succession planning.
Retention of Key Knowledge and Relationships
Knowing what will happen in an emergency keeps the existing knowledge and relationships within the organization. This is important for internal talent development and motivation. Employees are likely to stay within the company, even during transitions, if they know the company has a solid contingency plan and standard operating procedures.
Minimizes Disruptions and Costs
Not having a set business plan before a transition, like a sale or merger, can seriously interrupt the company's cash flow. Minimize interruptions to the day-to-day operations with an advanced business succession plan.
Preserves Business Value
Investors and market analysis favor companies with a long-term plan. This also helps maintain stakeholder confidence.
Mitigates Risks
When you have a contingency plan for death, disability, and transition, your company proactively avoids risks.
Steps for Developing a Succession Plan
There are several different strategies and options for small business succession planning. The following five general steps provide a good road map for the process:
- Choose Your Successor: Start by looking within the organization. Examine employees and your management team who may have the right leadership skills. Family businesses may benefit from impartial third-party consultants. This should begin at least 15 years before a planned retirement.
- Develop a Formal Training Program: First, identify critical functions of the company, whether they exist in the management team or not. Then, have your successor work in each of these areas. You need your successor to understand more than the executive duties. They need to understand the breadth and depth of your business. You may also have to allow your successor to make some mistakes along the way.
- Set a Timetable: Determine how and when control of the company shifts to your successor. Set milestones you want your successor to reach during their mentorship under you. Ease your successor into the position. Avoid the impulse to overrule their decisions during this transition phase. A gradual transition will help potential investors feel more at ease with the change.
- Plan Your Own Retirement: This may not seem related. Still, departing officers must prepare for their departure and plan the next chapter of their lives. This also will make it easier for you to let go and for your successor to take the reins fully.
- Execute the Succession Plan: If you have made the proper preparations, this should be as simple as handing over the company and stepping aside. Businesses whose owners install their successor during their lifetime typically have a much smoother transition to the new principal.
Succession Planning Strategies
When we think of succession planning, we usually think of a business owner simply handing over the reins to a new owner. However, there are several different financial options for business owners who would like their organization to survive beyond their time there.
Below are six strategies for succession planning:
- Selling Your Business Interest: You may sell your business interest outright in return for cash or other assets. Most partners or company officers can sell before they retire, at retirement, at death, or at any time in between. You may have to pay capital gains tax if you sell before death.
- Transferring Business Interest With Buy-Sell Agreement: This legal contract arranges the sale of your business interest in advance. It happens at a particular event, such as retirement, divorce, disability, or death. The buyer must purchase your interest at fair market value at the time of the triggering event. You can indicate the pricing for the sale or request market research and market analysis be done before the valuation is set at the time of the event.
- Grantor Retained Annuity Trusts or Unitrusts: GRATs and GRUTs are irrevocable trusts where you transfer assets while still obtaining an income for a given period of time. At the end of this period or upon your death, the assets in the trust go to the other trust beneficiaries. This is a sophisticated succession tool, so consult an experienced business attorney and accountant.
- Private Annuities: This is the sale of property in exchange for regular payments to you for the rest of your life. Ownership of the business transfers to family members or another buyer, who promises to make periodic payments until your death (and sometimes for the life of a surviving spouse). This allows you to avoid gift or estate taxes.
- Self-Canceling Installment Notes: SCINs allow owners to transfer a business to a buyer in exchange for a promissory note, requiring the buyer to make a series of payments. The remaining payments are canceled upon the seller's death.
- Family Limited Partnerships: This can help transfer business interests to family members. You establish a partnership with general and limited partnership interests, then transfer the business to the partnership. Over time, you may gift your business interest to family members.
Legal Help With Small Business Succession Business Planning
With the many options available to your business, entrepreneurs should seek step-by-step advice and establish a business plan. This helps reduce the stress on a new business during the transition. Speak to a business and commercial law attorney and accountant to learn about other business resources and how you can utilize succession planning tools and options.