Running a small business is deeply rewarding: You get to be your own boss while leading a team of employees toward industry success. But even if you’re relatively new to the game, the fact is that you won’t run this company forever. That’s where business succession planning comes in.
Succession planning ensures you’ll be ready to sell or hand over your business to new ownership in the future. When thorough, this planning can help your business function at the same level after the transition.
Knowing where to begin and which steps are necessary along the way is key to sustaining business continuity after your exit.
Why You Need a Business Succession Plan
In business, you always need to think forward. You don’t want to spend decades building a business and then sell it at the wrong time. Nor do you want leave your staff with a new owner who won’t uphold the company values.
Through business succession planning, you can avoid these snafus. But, according to a report by wealth advisory firm Wilmington Trust, 58% of business owners don’t have a transition plan; creating one puts you a step ahead of the competition.
Not only does business succession planning ensure that both your employees and customers are left in good hands, but it also helps:
- Your company remain viable and successful long-term.
- Maintain operations and company values.
- Stakeholders have peace of mind.
Here are seven steps you can take to ensure the succession of your business is effective and painless for all parties involved.
1. Create a Transition Timeline
There’s a lot more to business succession planning than handing over the keys. Forbes recommends that small business owners devise a five-year plan for shifting ownership. This timeline should identify which positions will need to be filled and when, when current employees should be notified of the transition, and ideally when you’d like to pass the torch. Planning this far out allows flexibility for making any needed adjustments later on.
2. Gather Financial Documents
Having financial documents organized and easily accessible will be crucial come sale time. And knowing how much your company is worth at any given time can help you decide when to launch a transition plan. Some of these financial documents include:
- Tax returns.
- Company valuation data.
- Up-to-date financial statements.
- Inventory records.
- Profit/loss data.
Additionally, tell family members or successors where to access this information in the event of an emergency.
3. Identify Potential Successors
The right successor is key to your company’s continued success. Is your successor a trusted family member or a current employee? Or will it be someone you’ll hire in the future? Putting your decision in writing will help keep your business in good hands.
4. Have a Buy-Sell Agreement
A buy-sell agreement is a legally binding contract that reallocates the business if you pass away or fall ill. In the agreement, include the value of owners’ shares, the company’s sale price and information regarding who is (and isn’t) allowed to buy out the company. Doing so reduces the risk of future conflicts among partners or family members.
5. Groom New Leaders
Though this process is ongoing, plan to dedicate between six and 12 months to groom the right successor. Make sure they know the ins and outs of the business and respect your future vision for the company. This business may be your legacy, after all, so don’t leave it in the wrong hands. And when hiring new talent, look for natural-born leaders who may take your place or lead the company someday.
6. Recruit Outside Help
Hire a consultant to organize company financial information when necessary, and use a lawyer to assist with legal documentation needed to sell your business or hand it down to family members. Though you may have an exit vision for your business, sometimes the nitty-gritty details can slow you down. Leaving these to the pros can help you focus on personnel shifts and other bigger-picture decisions.
7. Be Available After the Transition
Make yourself available after a new ownership transition in case your successor has questions along the way. Doing so helps ensure the best outcome for current and future employees, customers and stakeholders—and, it’s just good business.
If you’re leaving to start a new company, sustaining these industry connections will pay off big time. And, as the old saying goes, treat others as you’d like to be treated. You may need to call on one of your employees later in life or meet them at another opportunity. Being respectful during a business transition is always better than just cutting and running.
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