Importance of Having a Business Succession Plan

You’ve worked hard and spent the better part of your life building your business. Your years of work have paid off, and you have created a successful enterprise that has provided you with a good quality of life. But as you come closer to the day when it will be time to exit your business, have you thought about a succession plan?

CPA Succession

Many business owners put off developing a business succession plan until the last minute, but this could be a huge mistake. What happens if the unexpected happens? If there is one thing that the Covid pandemic has shown us is that life is very fragile, and no matter what your current age or health condition, no one is guaranteed another day on this planet.

Consider this scenario. You have a thriving business, and you have adult children, but they are not currently involved in your business, and you are not sure if they want to take it over after you move on. If something were to happen to you, there would be a lot of uncertainty around your business, and it would be very difficult to predict what would become of it.

Benefits of a Business Succession Plan: There are several key benefits for business owners when they develop a succession plan:

  • Protect the business from the unexpected. As we talked about earlier, business succession planning ensures that operations will continue in the event of the death or departure (for health or other reasons) of the owner or one of the partners. This provides peace of mind knowing that there is a plan in place if a worst-case scenario were to occur.
  • Minimize the chances of stakeholder disputes. Not having a succession plan is a recipe for chaos and conflicts between those who are left trying to pick up the pieces after an owner departs. Having clear directives in place to be followed helps mitigate this concern.
  • Uncover vulnerabilities within the business that should be addressed. Business succession planning goes beyond just planning for the unexpected. When you put together a succession plan, it provides an opportunity to take a closer look at the current operations and identify any weaknesses and vulnerabilities that need to be dealt with. Doing this will make your business stronger both in the short-term and long-term.
  • Develop a long-term vision and direction for the business. Speaking of long-term, planning for a future succession compels you to consider the long-term outlook of the business. You will have the opportunity to think about where you want the business to be in the coming decades, so you can customize your current operations to help you realize this vision.
  • Maximize the value of the business. By effectively addressing vulnerabilities in implementing more proactive long-term growth strategies, your succession plan will most likely make your business more profitable, which will increase its value as well.

Business Succession Options: As you put together your business succession plan, there are several potential scenarios for how your exit from the business will play out. Here are some of the most common:

Transfer the Business to a Family Member (Or Members): If you have children or other relatives who are actively involved in the business, you may want to turn it over to them when it is time for you to leave. There are several different variables to consider with this scenario, depending on your unique circumstances.

For example, if one of your children is more involved than the others, then you will need to think about how to equalize the inheritance for the children who do not want to own a part of the business. Or maybe you have business partners who are also relatives (such as siblings). In this case, you will need to consider their role in the succession plan as well.

Sell the Business to a Key Employee (Or Employees): Maybe you do not have any children who want to be involved in your business, but there is an employee or a group of employees who wish to buy you out when you are ready to leave. If this is the plan, you will need to think about giving these employees more responsibility and transitioning them into greater leadership roles with the company. At some point, you also need to discuss with them how they plan to finance the buyout.

Liquidate the Business: If you are a very small business such as a sole proprietorship and no one close to you wants to take over, then a liquidation could be an option to consider, depending on the type of business you have. Liquidation involves selling off the assets of the business at market value. This option could work for small businesses that own real estate and other tangible assets.

Sell the Business to An Outside Party: In many cases, an owner builds a successful business but there are no family members or employees who want to take it over. In a scenario like this, there is a very good chance that an outside buyer could come in and pick up where you left off. But where do you find a qualified buyer who is willing to pay what your business is worth?

If selling your business to a third party is your succession plan, then the best way to get started with this plan is to speak with a reputable business broker. Also known as “business intermediaries”, business brokers are professionals who leverage their experience and resources to help owners find an ideal buyer for their business. They also work closely with sellers to ensure a smooth and successful transition of ownership.

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