Create Your Business Succession Plan
Creating an effective succession plan is one of the most important things you can do for your business, as well as for others who care about it. By focusing on some of the most critical elements, you can avoid getting overwhelmed by the challenge. Consider these essential steps:
- Determine your options. Often, business owners want to pass the business on to their children or other family members. If you’re considering this, have a frank discussion with your family to find out who wants to take on the business, as well as if they are willing to and have the capacity to do so.
You still have options if there is not an obvious business successor in your family. You may want to ask an existing employee to run the business while you retain ownership, or sell the business to your employees. You may also choose to sell the business to an outsider.
- Make your business appealing to buyers. If you decide to sell your business, you’ll need to get your affairs in order ASAP. That may mean providing a plan to boost your sales and cash flow by liquidating overstock inventory or retiring burdensome debt if your business isn’t doing as well as planned. Creating a track record of increasing sales and improved profit margins will maximize the value of your business.
- Create a valuable team. You will need the right people on your team to execute your succession plan. Financial experts can help review and create succinct, understandable financial statements. A trusted lawyer can work with you on necessary legal documents and help you negotiate terms of a potential sale or ownership transfer. And a knowledgeable business broker can properly value the worth of your business and help position your firm for a potential sale.
- Construct a solid buy/sell agreement. Not all business transitions are planned. Sometimes an owner wishes to quit, becomes disabled or passes away. Your succession plan needs to account for unplanned events. The best way to be prepared is to create and maintain a buy/sell agreement. This agreement spells out how assets and other business interests will be distributed should an owner wish to exit the business.
An effective agreement will include guidance about transferring assets, stock ownership control and voting rights during certain events, like an owner retiring. It will also include how the business will be valued, as well as lump-sum and buyout payment provisions.
- Think through your transition. Your age, health, retirement goals and the readiness of a successor are all factors that will shape your transition plan. Take some time to think about issues, like whether you need retirement income from the business or if you mostly want to minimize estate taxes. This step will help you determine if you should maintain some involvement with the business or make a clean break.