Planning for a transition of business ownership can seem like an overwhelming task. With so many other things demanding your attention as a business owner, it is easy to put off succession planning - especially if you are not planning on retiring soon. Other common reasons for avoiding the task include assuming that colleagues and family members know your intentions or not having made important decisions yet regarding the future of your business.
Some experts recommend beginning succession planning at least five to ten years before you intend to retire or sell the business. It is also important to remember that life does not always work out according to plan. You could face something unexpected that forces you to retire early or you may decide to sell the business to pursue other interests sooner than expected. Having a business succession plan in place as early as possible can eliminate much of the stress associated with a transition of ownership, and ensure it is done correctly if plans change quickly.
What Does Business Succession Planning Mean, and How Should You Start?
The term “succession planning” refers to developing a strategy that guides everyone in the organization through a change of ownership. A succession plan must be in writing to be valid, and it should provide step-by-step instructions that everyone involved can understand.
Transferring ownership of a company from one person or group of people to another party can happen in one of several ways. Here are the most common:
If you plan to sell the business, be sure to lay out the desired terms of the sale and the price you would like to get. Taking these steps will help lessen the burden on your heirs and business associates if you suddenly pass away or become unable to run the business. The following information should be included in a succession plan as well:
Introduce the New Business Owners
Regardless of who will take your place, you’ll need to let all your employees know about any changes before they happen. However, alerting them too soon could cause anxiety, rumors, and the circulation of incorrect information.
In most cases, you should wait to inform employees until the deal is finalized. At that point, you can provide details on the transition including whether you plan to be involved at all after the new owner takes over. That said, you should let key personnel such as your management and leadership teams know about your transition plans sooner. This way, they can help guide your other employees through the changes.
Review Your Business Succession Plan Regularly
It is important to remember that your succession plan may change over time. Maybe you wrote a succession plan five years ago that no longer makes sense in light of the current economy or growth your business has experienced. Circumstances beyond your control can have a dramatic impact on your succession planning, and your plan should be adjusted accordingly. This is especially true if you create a succession plan with no concrete intentions to execute it in the short-term.
You may also need to consider the impact of new tax laws, changes to your business valuation, or industry developments that you did not foresee when you initially wrote your plan. Changing family dynamics can also be a concern if you plan to bring in one or more family members to replace you. Whatever the situation, reviewing a previously written business succession plan at least once a year is wise.
BankFive is dedicated to helping MA and RI business owners find the right solutions for their business. Whether you're eyeing a merger, looking to put together a business succession plan, or evaluating retirement plan options for your employees, our business planning team can help. Schedule an appointment today.
Some experts recommend beginning succession planning at least five to ten years before you intend to retire or sell the business. It is also important to remember that life does not always work out according to plan. You could face something unexpected that forces you to retire early or you may decide to sell the business to pursue other interests sooner than expected. Having a business succession plan in place as early as possible can eliminate much of the stress associated with a transition of ownership, and ensure it is done correctly if plans change quickly.
What Does Business Succession Planning Mean, and How Should You Start?
The term “succession planning” refers to developing a strategy that guides everyone in the organization through a change of ownership. A succession plan must be in writing to be valid, and it should provide step-by-step instructions that everyone involved can understand.
Transferring ownership of a company from one person or group of people to another party can happen in one of several ways. Here are the most common:
- Pass along ownership of the business to one or more family members.
- Sell the business to a key employee whom you have trained for the role. You also have the option of selling the company to an interested outside party.
- If you are in a business partnership, you can consider selling your ownership interest to the other partner(s).
If you plan to sell the business, be sure to lay out the desired terms of the sale and the price you would like to get. Taking these steps will help lessen the burden on your heirs and business associates if you suddenly pass away or become unable to run the business. The following information should be included in a succession plan as well:
- An official valuation that lists what your business is worth as well as financial statements.
- The names, positions, and contact information of potential successors.
- Estimated timeline for the transfer of ownership, assuming that an emergency does not necessitate an expedited transition.
- Funding sources for the business succession, such as a seller’s note, stock transfer, or sale of a life insurance policy.
- Your business’s standard operating procedures, such as training documents and employee handbooks.
Introduce the New Business Owners
Regardless of who will take your place, you’ll need to let all your employees know about any changes before they happen. However, alerting them too soon could cause anxiety, rumors, and the circulation of incorrect information.
In most cases, you should wait to inform employees until the deal is finalized. At that point, you can provide details on the transition including whether you plan to be involved at all after the new owner takes over. That said, you should let key personnel such as your management and leadership teams know about your transition plans sooner. This way, they can help guide your other employees through the changes.
Review Your Business Succession Plan Regularly
It is important to remember that your succession plan may change over time. Maybe you wrote a succession plan five years ago that no longer makes sense in light of the current economy or growth your business has experienced. Circumstances beyond your control can have a dramatic impact on your succession planning, and your plan should be adjusted accordingly. This is especially true if you create a succession plan with no concrete intentions to execute it in the short-term.
You may also need to consider the impact of new tax laws, changes to your business valuation, or industry developments that you did not foresee when you initially wrote your plan. Changing family dynamics can also be a concern if you plan to bring in one or more family members to replace you. Whatever the situation, reviewing a previously written business succession plan at least once a year is wise.
BankFive is dedicated to helping MA and RI business owners find the right solutions for their business. Whether you're eyeing a merger, looking to put together a business succession plan, or evaluating retirement plan options for your employees, our business planning team can help. Schedule an appointment today.