Successful Succession Planning Starts Early

by | Jul 14, 2014 | *Financial Awakenings, Business Owners, Retirement Planning, Weekly Column

keys-on-ring-thBuilding a successful small business is somewhat like being a parent. You start with an infant enterprise that needs constant attention and often deprives you of sleep. You foster it through various stages of growth, including some rocky times, and enjoy seeing it become able to stand on its own. And eventually, you may rely on it to carry on your legacy and take care of you financially.

Making that transition from taking care of your business to having the business take care of you is the purpose of succession planning, which helps ensure the orderly transfer of a business to the next generation.

A succession plan is especially important if you want the business to continue beyond your career or your lifetime. It also matters if you need to monetize your investment by selling the business. It’s not a given that these two issues are important to every owner.

The first step in a succession plan, then, is to figure out what you want for and from your business in the long term. Is your goal to pass it on to later generations within the family or current employees? Will you search for new ownership from outside the company? Can your buyers pay cash, or will you need to finance a portion of the sale? Do you need the sale proceeds to fund your retirement, or would you like to structure the sale to leave a financial legacy for your heirs?

Or will the end of your working life mean closing the doors? Some small businesses are so tied to the owner’s skills and interests that the owner’s retirement effectively brings the business to an end. This might be the case for, say, a craft-based business, a professional practice, a consulting business, or a design firm where you are the main talent.

Once you have clarified what you want, don’t wait too long to do the actual planning. For an internal succession plan, it’s important to start about 10 years ahead of your anticipated retirement. One of the biggest challenges here is identifying an internal successor and developing that person’s skills. It’s not uncommon to go through several potential successors before finding the right one. If keeping the business in the family matters to you, it’s essential to make sure anyone you consider to take your place really wants the job. Grooming a family successor whose heart is not in the business can be a recipe for both business and family struggles.

If you plan to sell the business, starting five years prior to retirement is probably sufficient. You’ll need to get the financial books in order and make sure you have the appropriate staffing. It’s also a good idea to leave a few years for the marketing of the business ahead of and during the transition.

A typical challenge with selling a business, whether inside or outside the family, is how to structure the deal. Financing the purchase is an option that carries some risks. It’s a good idea to secure the purchase against collateral other than the business itself.

Another choice is to start by selling perhaps 10% or 20% to a potential successor, then selling more shares over time until the new owner owns the majority. Keeping some ownership can provide you with dividends to help fund your retirement.

If your business ends when you retire and isn’t a saleable asset, what you need is a “cessation plan.” This plan is simple, but needs to start early in your career: make sure you use part of the income from your business to fund your retirement and provide for your future.

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