When it comes to building your business, nothing about it feels small. You’ve likely put in years of hard work, financial risk, and other sacrifices to see your business grow. The last thing you want to do is be the reason your venture does anything but thrive.
That’s why developing a small business succession plan is essential. When you’re ready to retire, you have a number of options for passing your business on to someone else, and a succession plan outlines your wishes for that transition.
Let’s talk about what this type of plan looks like and how it can benefit your employees, customers, and, above all, you!
Common Types of Ownership Transfer
If retirement may be on the horizon within the next few years, the first thing to start thinking about is who your small business will go to next. These are only 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.
What Is a Succession Plan?
A succession plan determines when, how, and who will take over your business, as well as how you’ll be compensated. It’s not only a matter of naming new leadership but also ensuring that operations run smoothly for everyone involved. When the time is right, you can begin building your small business succession plan by gathering the following information.
- Successor(s) – As we’ve mentioned, one of the most essential decisions to make before you retire is who will take on your role as business owner. In addition to ownership, think about other responsibilities this person or other employees may assume and for how long.
- Timeline – How will you train your successor until they formally take over business operations? Are there long-term changes that need to be put into effect now to support your transition?
- The Value of Your Business – After years of hard work, you’ll want to know what your business is worth before you decide all of your next steps. Consider popular valuation strategies and reach out to local experts for an estimate.
- A Communications Plan – Transferring your small business to someone else may create unnecessary stress if your employees and vendors aren’t well informed. Include an outline of how and when you will share key information with anyone affected by the change.
- Taxes – 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 a tax advisor to clarify your strategy and how it may affect you and your successor.
- What Ifs – 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. It may be wise to consult a legal or financial advisor for the possibilities that are hard to predict.
Benefits of a Small Business Succession Plan
You may need a succession plan for many different reasons. If your family has been involved in setting up and running your business alongside you, you’ll want to eliminate confusion by formally establishing a successor and potential roles for other members of your team and/or family.
You can also retain a degree of say over how the central processes of your operations can be maintained or improved. Things like production or payroll are critical, and you don’t want to leave your team hanging when you’re no longer in charge of the day-to-day of your business.
Over the years, you’ve likely worked hard to forge valuable relationships with vendors, customers, and other stakeholders. Make sure any important contact information, plus any need-to-know tips for managing those relationships, are included in your succession plan.
After all your hard work, you deserve to enjoy the fruits of your labor for years to come. A succession plan is essential in defining how you’ll be compensated for the business and whether you’ll receive any long-term financial benefits as it continues to thrive so that you can prepare for retirement.
Final Considerations
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 how-to model for how your business can continue to operate after your retirement.
Keep in mind that your succession plan may change over time. If you begin developing it years before you plan to hand over the keys, you can continue adjusting as circumstances shift. However, having a plan 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.
