While many businesses run for years, and in some cases even generations, businesses open and close all the time. There are many reasons why an owner might decide to close his or her businesses’ doors. These can be both professional and personal decisions, which might include an offer to purchase from another company, dissatisfaction with the business, changes in the market, or simply retirement.
Retirement should also not be the only influence an owner considers. There are things in life that simply get thrown at us without warning and a proper succession plan ensures the right people inherit the business, your operation and fruits of your labor continue to run smoothly.
Unfortunately, most small business owners do not have a clear succession plan for their exit. Whether it be the unpleasantness of discussing such scenarios or getting wrapped up in the operation and success of one’s business to even think about succession, many owners are not prepared.
If you own a business and fall into this category, it’s time to start thinking about and developing a succession plan. If this is a family business, you might consider transferring ownership through your own estate planning process such as in a will or trust. Often, however, new ownership comes from a pool of your existing employees. You’ll want to prepare people for management and leadership roles in order to replace you or others when the time comes.
Prior to developing a strategy with your attorney or accountant, you will want to gather financial documents. You’ll want a clear business valuation which is typically a combination of your assets such as cash, receivables, inventory, equipment and real estate and your net profit over time. This is most important if your succession plan involves selling your business, and of course, having these documents organized and prepared constantly can help protect the business in the event there needs to be an unexpected sale.
Your business will want to have buy-sell agreements in place. These are legally binding contracts that if you, as an owner, were to pass away or become incapacitated there are clear steps for the business to mandatorily buy your interest in the business. This is typical in a business with multiple owners such as an LLC or corporation. Buy-sell agreements are also great in family businesses because ideally conflicts are eliminated between family members as the plan is put in place far in advance with everyone on notice of how shares will be bought and transferred by the business.
Finally, in a perfect world, you will want to identify key potential successors to your business. Taking the time to select and train the right person helps ensure your small business will continue for many years beyond your ownership. A proper succession plan can take into account the training and development of your potential successor. This plan can also ensure your potential successor doesn’t leave your business. As the need arises, with good succession planning, employees or family members are ready for new leadership roles.
This all calls for careful and detailed preparations. It may be quite difficult to even consider your business being run by someone else, but it is necessary, and we recommend you talk with an attorney and accountant to begin creating the succession plan your business absolutely needs.