Succession planning is one of the most neglected aspects of business ownership. No matter what plans you have for the future of your business, eventually it will transition to someone else, whether it’s a purchaser, key employee, or a family member. It’s important to have a plan in place so that the transition goes smoothly, even in the face of an unexpected event. In this blog, we’ll take you through how to create a business succession plan.
Why Create a Business Succession Plan?
A business succession plan is important for several reasons:
1. Continuity
A business succession plan ensures that the company continues to operate smoothly after the departure of the founder or key executives. Customers, employees, and other stakeholders will not be negatively impacted by the transition.
2. Minimizes risk
A well-executed succession plan minimizes the risks associated with unexpected departures and reduces the likelihood of disputes among family members or other stakeholders over the future of the business.
3. Maximizes value
Having a plan in place maximizes the value of the business in the event of a sale or transfer of ownership. It ensures that the business is in a strong position to attract potential buyers or investors and that the transition process goes smoothly.
4. Provides peace of mind
Having a succession plan provides peace of mind to the founder, key executives, employees, and other stakeholders that the future of the business is secure and that it will continue to thrive.
How To Create a Business Succession Plan
Step 1: Choose A Successor
Start by identifying the key executives in your business, who are responsible for the day-to-day operations of the company. This could include managers, directors, and other key employees who are essential to the smooth running of the business.
Determine who could take over your position or the key executives’ positions. This could be someone within the company, a family member, or an outsider. Consider their skills, experience, and qualifications. There may be multiple people who are fit to take over.
Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement.
Step 2: Communicate The Plan
Privately and confidentially communicate the business succession plan to all relevant parties, including key executives, employees, and family members. Ensure that everyone understands their role in the transition process.
Step 3: Set Up Professional Development
Hopefully you have already been investing in the professional development of those you select as your succession choices. A training program will help equip them with the skills and experience they need to take over the position successfully. Connect them with mentors that can boost their leadership abilities and other soft skills.
Step 4: Determine Business Value
If business owners decide to cash-out, the value of the business or at least the exiting share needs to be determined. An appraiser, certified public accountant, or business broker can help conduct an accurate valuation. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner’s interest will be determined by the stock’s current market value.
Step 5: Life Insurance
Once a set dollar value for the business has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner’s share of the business and distribute it equally among the remaining partners.
There are two basic arrangements used for this purpose, cross-purchase agreements and entity-purchase agreements, which are used in different situations.
Step 6: Seek Professional Advice
Proper business succession planning requires careful preparation. Seek advice from an attorney, accountant, financial advisor, or business broker to ensure that your business succession plan is legally and financially sound. This ensures a smooth and equitable transition for all parties involved.
Global Business Brokerage
Global Business Brokerage is here to guide you through the business landscape. Whether you’re buying, selling, or transitioning a business, we’ll use our expertise and network connections to get you to the finish line. Schedule a consultation with us.
Comments