Have You Built Your Business Succession Plan?
Here’s How to Get Your Road Map in Place Right Now
If you own your own business, you have most certainly considered that someday you will leave the company, whether to retire or for another professional pursuit. If you were working for someone else, it would be as easy as announcing your retirement or giving two weeks’ notice, but it’s much more complex for business owners. You’ll need a road map for the continued success and financial viability of your company, and one that provides a sense of certainty for your employees and your clients or customers. This road map is called a business succession plan.
Your business succession plan should plot out everything from leadership transition, to how ownership will be transferred, to the price and terms, to how to avoid disputes during this process. It should also be a means to ensure you will have enough money to retire. It is meant to be an all-encompassing plan that will allow you to make your exit confidently, knowing that you have prepared everything necessary for the business to continue to thrive, and for you to take your next step.
Naturally, a plan of this magnitude requires thoughtful strategy. If you’re just beginning to build your business succession plan, this is how to begin.
Step 1: Begin Early
Optimally, a business succession plan will be created over a long time horizon. The last thing you want to do it to begin making crucial decisions after you’ve already decided to make your exit. You want to have time to think not just about how you’ll exit, but also about the legacy you’ll leave behind. Careful planning is essential for these reasons, but also because some of the decisions you’ll need to make will have a far-reaching impact on things like whether you’ll need to sell or transfer your interests. The sooner you begin planning for all of these eventualities, the smoother the transition will be.
Step 2: Choose Potential Successors
Although it’s a difficult thing for most business owners to think about, you’ll have to hand over the reins to someone when you leave. It’s smart to identify more than one person who may fit the bill at first, grooming them to continue company operations and your desired legacy. Hedging your bets by preparing more than one person to take control ensures your plans won’t be ruined if one potential successor chooses to leave the company. Eventually, you’ll want to choose one person and make your wishes known to them. If you do have multiple successors in mind, it’s important to be clear about who will take over what, and in what capacity.
It’s also important to inform your family about your succession plan. Many businesses are a family affair, and your loved ones may be impacted by your plans. The best business succession plans also help reassure family members that you are committed to a fair and equitable process as the business transitions.
Step 3: Know What Your Business is Worth
As you begin the succession planning process, it’s important to have a good idea of the value of your business. This allows you to have an informed idea of how much your successor should pay to purchase the business from you, and it allows potential successors time to save the amount they’ll likely need. Your successor may even choose to take out a life insurance policy on you in case you should pass away unexpectedly, and they need to purchase the business sooner than expected.
Step 4: Develop a Buy-Sell Agreement
Your business succession plan should make it clear who will take over the business, but it’s the buy-sell agreement that sets out the exact terms of the transition. This includes how any transfer of ownership will be funded. It is not uncommon for business owners to fund their buy-sell agreements with life insurance, either term or permanent. A term policy can be attractive and cost-effective if you have a date in mind for leaving the business that isn’t so far off in the future. It secures a temporary death benefit for a specific window of years. A permanent life insurance policy allows you to accumulate cash value, and it offers lifetime protection. In many ways, it provides greater flexibility than you get with a term policy. In fact, you may even be able to transfer ownership of the policy to yourself when you leave, allowing you to access and use the accumulated cash value on whatever you want to while naming your own beneficiary for the death benefit.
Step 5: Get Professional Help
Both business succession plans and buy-sell agreements are legal documents. You should be sure to consult with legal, financial, and tax advisors to make certain they are crafted properly and that they can be executed in your desired manner. If you’re planning to pass the business along to a family member, it’s useful for your advisors to be well-versed in both personal and business planning issues.
You’ve worked hard to build your business, and a thoughtful business succession plan ensures that none of your hard work has been in vain. If you’d like to discuss your strategy, please contact us today to begin a conversation. We can help you develop the road map for your company’s future, which will preserve your legacy and support your hard work for years to come.