Why Every Business Owner Needs a Succession Plan
If you are a business owner, it is never too soon to start planning for your retirement or departure from the business, and create what’s known as a “succession plan.” Unexpected events can happen at any time, so merely preparing for retirement is not enough. Ideally, your succession plan will be established on day one of your business, but with so many other details to coordinate this often gets lost in the shuffle.
Unfortunately, many don’t realize this mistake until it becomes too late, either for that owner, their family, or their business. A recent survey by Wilmington Trust found that almost 60 percent of small business owners had not established any succession plan. However, with the uncertainty of life – and business – it is a necessity to plan so that a smooth ownership transition can be made without disrupting the business. A smooth transfer and exit strategy begins with making key, strategic decisions.
First up is gathering and consolidating company documents, such as valuation data, inventory, tax records, and financial statements. These are crucial for providing to prospective lenders if seeking business capital, but also prospective buyers of the business will want to review these to see the shape and potential of the company. Getting these records organized helps efficiency later and protects the company in the event of unexpected events or circumstances.
Next is identifying potential successors for your business. If handled properly, a business can continue flourishing beyond expectations after the original ownership ends. However, finding the right successor takes time and effort. Whether the intended successor is a family member, friend, business partner, employee, or outsider, their ability to manage the business needs to be evaluated and they’ll also need to be trained on the business operations. Rather than giving the reins to somebody without intimate knowledge of the business, you can ensure the company is passed on to somebody who can provide a seamless transition.
You’ll then have to determine how much the business, and your ownership, is worth. When an owner retires – either by choice or other means – a dollar value for the business needs to be calculated. This is often done through an appraisal by a CPA or by written agreement between the owners. If the ownership consists solely of publicly-traded stocks, then the valuation would be determined by the stock’s then-current market value.
With these pieces, you’ll be able to create a succession plan that prepares your business for an eventual ownership transfer. The bottom line is that with proper business succession planning, you’ll be able to provide a smooth transition to keep the business operating without hiccups. Proper planning requires careful, deliberate preparation. All business owners should seek advice and help from competent, experienced advisors in making these plans. This includes tax and accountant help, as well as experienced legal advisors and attorneys – such as at the Dills Law Firm.
DISCLAIMER: This post, and all posts on DillsLawFirm.com are meant to provide basic education on a range of legal issues. Nothing written here should be construed as legal advice regarding any particular situation. No attorney-client relationship is created by this post or the information contained herein, and this post may constitute attorney advertising. To get specific legal advice, you should seek out the services of an attorney.
