If you own a business, you need a succession plan

If you were hit by a bus today, what would happen to your business?

That’s not exactly the kind of thing a business owner wants to think about, but it’s definitely something they should be thinking about. The fact of the matter is, it’s never too early to put a succession plan in place.

A solid succession plan not only ensures the fruits of your labors will survive after you’re gone, but, should you decide to sell and retire somewhere warm, it will also help the market valuation of your business.

Whether you’re a sole owner or partner, whether it’s a small or middle-market business, whether it’s governed by family or by an outside board, when you’re focused on managing the present, it’s hard to think about what comes after you’re out of the picture. That’s where a thorough, well-documented succession plan comes in.

A good succession plan takes into account four aspects.

Vision

The future is never guaranteed, but there’s a lot you can do now to help set your business up for continued success. It all starts with knowing your business and personal goals, and building a team to help you get there.

• Business goals – Identify your long-term business goals and vision for the future.
• Management team – Make sure you have a management team in place that understands your vision and can help you achieve your goals. To ensure your team will share your vision, it’s essential to align their compensation to specific goals.
• Life after work – Think about your retirement goals and cash flow needs. Do you want to be completely removed from the business or just wish to take on a more limited role?

Succession

Like any good dynasty, knowing who’s next in line for the throne reduces chaos and infighting. That’s why it’s important to identify who will take over after you’re out of the picture and make sure they’re qualified and capable of taking the reins.

• Identify a successor – Will it be a family member, a business partner, or will you have to hire for the role? If that person is unavailable, what’s your backup plan?
• Start training – It’s never too early to show your successor the ropes and start delegating some of your tasks to them.
• Develop a timeline – Set a timeline for your departure, communicate it to stakeholders, and stick to it.

Transition

This is where we get into the real nitty-gritty of transition planning. From valuation to transfer of ownership, this can make or break the future of your business.

• Valuation – How much is your business or share of the business worth? If it’s a publicly traded company, it’s typically based on stock market value. If not, you’re going to need an independent valuation.
• Ownership – If your business is to be purchased, will it be financed by an outside party or self-financed?
• Insurance – Even if you’re not planning on stepping down, all partners in your business should be covered by life insurance that substantially pays for cross-purchase agreements and entity-purchase agreements.
  • Cross-purchase agreements – Partners are both owners and beneficiaries on policies covering each other partner’s stake. If one partner dies, the face value of their policy is paid out to the surviving partners and used to purchase their share of the business.
  • Entity-purchase agreements – This common option names the business the policyholder and beneficiary on policies covering each partner. Upon death, the company purchases the deceased partner’s stake at a previously agreed-upon price.

Communication

Communication with all stakeholders–including family members, if it is a family-run business–is the key to a smooth succession.

• Family involvement – Establish processes for involving family members in decision-making, including how they will be involved in the business after your exit.
• Write it down – Get your plan in writing and distribute it to stakeholders and those it directly impacts.
• Revisit often – Your business is constantly evolving, and so should your succession plan. I advise my clients to revisit their succession plans yearly. I even know some businesses that make this a family retreat; where all of the kids and grandkids get together to learn about how the business is doing, where it’s heading, and how to manage the unforeseeable.

To learn how Bank Mutual can help your business succeed, contact one of our commercial lending experts today.