Why Every Small Business Owner Needs to Start Their Succession Planning Now
Proper succession planning calls for careful consideration and preparation.
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As business owners approach retirement age, it's never too soon to outline a succession plan. But retirement is far from the only force pushing proprietors out of ownership. Unexpected life events can happen at any age, and a succession plan ensures the right people inherit the business, operations continue to run smoothly and owners are able to exit under fair circumstances.
In other words, proper succession planning is an absolute must and should begin on day one of ownership, if not before.
Yet most business owners are not prepared for their exit. In fact, a Wilmington Trust survey found nearly 60 percent of small business owners do not have a succession plan in place. The majority of owners without a plan say they enjoy managing their businesses too much to even think about a transition of ownership, while 44 percent of owners believe succession is still too far away in the future. But life can come at you fast, and the future can become the present in an instant. Bottom line: If you own a business and haven't built out your succession plan yet, it's time to get started..
How small business owners can build a roadmap for succession
A smooth transition of ownership starts with a handful of strategic decisions and the organization of company financials. When developing an exit strategy, consider the following actions:
- Gather financial documents. The key to a smooth transition of ownership starts with consolidating documents like company valuation data, inventory, tax returns and up-to-date financial records. Buyers and lenders will want to see how the business has performed historically before agreeing to a deal. Proactively organizing financial documents also protects the business in the event an owner has to sell unexpectedly or a family member must handle the transition under more dire circumstances.
- Establish buy-sell agreements. Buy-sell agreements are legally binding contracts used to reallocate portions of the business if an owner passes away, falls ill or expresses interest in selling his or her share. These agreements formalize information like a company's sale price, the value of each owners' share and ground rules spelling out who can or can't be a buyer. A buy-sell agreement also reduces the risk of conflicts that could arise between family members or partners who may put their best interests ahead of the company's.
- Identify potential successors. In the right hands, a small business can continue to flourish well beyond the tenure of the original owners. However, finding the right person, whether a family member or outsider, takes time. In addition to selecting who to transfer ownership to, business owners need to train the new owner on how to run the business. This gives owners an opportunity to take inventory of the potential skills and traits the next successor will need to ensure the long-term success of the business.
Consolidate all account information. Prior to handing the keys over to a new owner, current proprietors should consider organizing all of their account information to ensure a seamless transition. As part of their succession plan, owners should store login credentials for bank accounts, email servers and IT systems in a secure place to pass down to their successor when the time comes.
Proper succession planning calls for careful consideration and preparation. While it may be difficult to entertain the thought of exiting the business, unexpected circumstances can force proprietors to veer off script and seek new ownership immediately. Whether someone is nearing retirement age or just setting up shop, small business owners should take time now to build a succession plan that protects their business' longevity and secures their financial future.