Small business owners rarely have it easy. They usually handle all kinds of different tasks and not infrequently may find themselves being pulled in multiple directions at the same time.
Given all this, planning for the future might not be at the top of their to-do list. But whether you want to pass the business to the next generation of your family or an outsider, succession planning helps ensure the company will not lose its momentum when it changes ownership.
It is never too early to set up a business succession plan. If something happens to you or you simply decide to retire, knowing you have the right successor can be reassuring for your case.
What is business succession planning?
Business succession planning is the process of identifying who will lead your business (or businesses) after you leave it and ensuring a smooth transition.
Why bother creating a succession plan in advance?
There are many reasons:
- Makes sure the right person is in charge should a change happen quickly
- Gives you time to get your successors ready
- Allows you to prepare the company to function without you and arrange financing for the transition
- Gives you time to optimize the company’s value
Why create a succession plan and how?
Succession planning can ensure a smoother transferring of ownership and control of your company to new management.
- You should start your business succession plan at least two to five years ahead
- Put the plan in writing and revisit it on a regular basis (Succession planning is a process, not a one-time task)
- Communicate the plan with all stakeholders
Every business is unique, so there is no one-size-fits-all solution or a cheat code for ensuring a smooth transition. All the same, you would do well to follow these time-and-tested tips for creating a succession plan.
Start planning early
A change in a company's ownership does not occur overnight, but abrupt changes can. Making important decisions quickly and avoiding confrontation are both made possible by having a succession plan in place.
As a business owner, let's say you wish to part the business equally among your three children. A shareholder's agreement should be established well in advance to ensure that all parties are aware of your decision and assist prevent future disputes. Make sure all of your business documents (like the articles of incorporation) are organized.
Choose the ideal successor
Many business owners choose to pass their company on to the next generation, but you also have the option of selling your stake to a business partner, choosing a senior executive to take your place, or selling the company to a third party.
- Do they want to run the business once you retire? should be your first consideration when appointing a successor.
- Do they share your enthusiasm for the company?
- Do they possess the expertise and understanding necessary to expand on your business's success?
- Do they support the mission, objectives, and values of the business?
Groom your successor
Once you have picked a successor, inform the key stakeholders of your choice. Also, determine how much time it will take to groom the successor for a smooth transition.
When to start your succession plan
Starting a business succession plan today is the best option because tomorrow may be too late.
You can find yourself suddenly unable to run your business due to an illness or accident. Or, a senior executive can abruptly leave the organization. How would your company survive if you or another important employee were to leave? that would replace those that are essential to your company?
Business Insurance is an option, but you should still ensure your success by setting up more plans.
Planning for succession enables you to foresee the actions that will be taken in the event that a key employee leaves your company.
Even though you can't anticipate the future, you can plan how your company will react to unfavorable circumstances. Without a business succession plan, your organization might struggle if you or any important employees unexpectedly left. A succession plan enables you to develop a strategy for succeeding even the most crucial members of the organization, ensuring that it will be able to survive during difficult times.
What is your exit strategy?
The two most crucial questions for a business owner to address are:
- When do you wish to leave the company you built?
- How would you like it to be left?
- Do you want your kids to run the company someday?
- Do you wish to transfer your ownership to a coworker?
- Are you considering selling your business to a third party?
- Do you intend to shut down the company and sell off its assets?
It's time to make a succession plan after deciding on your exit strategy. Even if you don't see yourself retiring anytime soon, don't put it off. The earlier you begin the transformation process, the better; it can easily take five years longer to complete.
As a business owner, say you want the family business to pass to your daughter. Even though your daughter is only in her early 20s, you do not intend to give her control of the family business until she is 30. But that does not imply that you should put off succession planning for the time being. You can:
Discuss the details of the sale with your bank
Give you ample time for tax and estate planning
Groom the future CEO
5 Reasons to Have a Business Succession Plan
By the way, here are top 5 reasons for putting a succession plan in advance:
- Ensures your business will experience minimum disruption if an unexpected event occurs
- Allows you to plan for retirement
- Gives you time to pick and groom a suitable successor
- Ensure a smooth transition process to other people
- Preserve what you worked hard to build
Does Life Insurance Play a Role in Succession Planning?
If you're and entrepreneur who owns a firm with a partner, life insurance can be an important instrument for succession planning. When a company partner dies, their stake usually passes to their heirs. But, let's face it, neither you nor your business partner want that. Instead, you both want the surviving partner to have complete control of the family business. A buy-sell agreement, typically covered by life insurance, can help to ensure this.
A buy-sell agreement states that when a business partner leaves the company, their stake of the company can only be purchased by the other partners.
Here's how a buy-sell deal works:
- Determine the event that will precipitate a buyout. Death, long-term incapacity, retirement, bankruptcy, divorce, and other life events may serve as triggers.
- Determine the value of each partner's shares or agree on a formula that will be used for valuation when a covered event occurs.
- Purchase a life insurance policy on the life of your spouse, who will take out a policy on your life.
- If a covered event occurs, the surviving partner will utilize the life insurance proceeds to buy out the leaving partner's interests from their heirs.
Keep in mind that permanent life insurance is usually a better alternative for funding a buy-sell arrangement than term life insurance. A perpetual life plan does not have an expiration date, so you can be confident that the insurance will pay out regardless of when the insured dies. These plans also accumulate cash value, which you can use at any moment and for any purpose.
Is a business succession plan right for me?
A succession plan helps preserve what you have worked hard to build when you retire as an owner (or owners). You should start planning at least two to five years before you step back.
If you are in a business partnership and want to set up a buy-sell agreement using life insurance, Dundas Life can help you. You can count on us to help you find the right policy at an attractive price to ensure a smooth business transition when the time comes.