Building a business is no small task. As an entrepreneur, you’ve likely put years of work into growing your business, and you want to see it continue to thrive.
That’s why developing a small business succession plan is essential. When you’re ready to retire, you’ll need to pass your business on to someone else, and a succession plan is the outline for that transition. It determines when, how and who will take over your business operations, as well as how you’ll be compensated.
Benefits of a Small Business Succession Plan
You may need a succession plan for many different reasons. Here are a few common ways founders use their plans to ensure future small business success:
Formally establish a successor
When it’s time for you to retire, one of the most important things to decide is who will take over your business operations. A succession plan can help keep your transition on track.
Maintain or improve central processes
Over the years, you’ve developed processes for creating your product or service, as well as managing your staff. From payroll to production, it’s essential to give your successor insight into these tasks.
Give direction to your employees
If you manage several employees, how will the change affect them? Make sure your plan outlines who will take on any leadership roles and tasks that would otherwise be left undone after you leave.
Share key contacts
As a small business owner, you’re familiar with valuable vendors, customers and stakeholders. Make sure any important contact information, plus any need-to-know tips for managing those relationships, are included in your succession plan.
Ensure you’re taken care of
If building your small business has been a lifetime project, you deserve to enjoy the fruits of your labor for years to come. Establish how you will be compensated for the business, and whether you’ll receive any long-term financial benefits as it continues to thrive, so you can prepare for retirement.
Common Types of Ownership Transfer
If retirement may be on the horizon within the next few years, it’s time to start thinking about who will manage your small business in your place. Here are a few of the most common types of business succession.
- Co-Owner or Long-Standing Employee: If you have a partner or a key employee who knows your operations well, they may be interested in buying the business.
- Family Member: If someone in your family will be taking over the business, take time to train your heir and make sure they understand their tasks.
- Third-Party Buyer: If you’re interested in selling your business to another individual or company, a succession plan is especially important, as they will likely have less knowledge of your operations than a co-owner or family member.
Parts of a Small Business Succession Plan
When the time is right, you can begin building out your small business succession plan to ensure your company continues to grow and thrive. A well-structured plan should include the following information.
How will you train your successor until the date they formally take over business operations? From using small business financial tools to managing employees, a succession timeline breaks down these details.
Choose a successor
One of the most essential decisions to make before you retire is who will take on your responsibilities as business owner.
Valuate the business
After years of hard work, you’ll want to know what your business is worth before you agree to sell. Explore Nerdwallet’s article on how to value a small business for more on this topic.
Create a communications plan
Transferring your small business to someone else may create unnecessary stress if your employees aren’t well informed. Include an outline of how and when you will share key information with employees who are affected by the change.
When you’re building a business, it makes sense to focus on tax efficiency and savings. Before you sell, though, it may be wise to transition to strategies that add value to the business, rather than concentrating on tax efficiency. Speak with your tax advisor for details.
Expect the unexpected
You’ve likely heard that “the one constant is change,” which is especially true in the world of business. Before signing off on your succession plan, be sure to make contingency arrangements for certain circumstances, for example, if you or your successor are no longer able to maintain the succession timeline for health reasons.
Communicate with your financial advisor as you’re developing your small business succession plan to make sure you’ve accounted for essential details.
As a small business owner, you have a responsibility to your employees, and to yourself, to make the most of the company you’ve built over the years. A small business succession plan establishes a trustworthy replacement who can manage its operations after your retirement.
Keep in mind that your succession plan may change over time. If you begin developing it years before your retirement, you can continue adjusting as circumstances shift. Simply having a plan in place is a terrific first step in ensuring your company’s long-standing success.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.