Do You Have an Exit Plan – Succession Planning

It’s likely that most business owners don’t have an exit plan. Many have probably not even heard of succession planning. That’s unfortunate. Succession planning is all about dealing with contingencies, including your eventual retirement from your business. That’s why you need to get the succession planning process going as soon as possible.

It isn’t necessarily a document that you prepare today and then file away forever. Rather, you prepare an initial plan and then develop and amend it as you move forward. The idea is to have the plan ready on a moment’s notice, whenever it’s needed.

What is Succession Planning?

Succession planning is creating a formal document that a business owner uses to outline a strategy to deal with a variety of different business contingencies. Most will involve the owner’s departure from the business. That departure can be either temporary or permanent.

A temporary departure might be brought about by an illness or injury to the business owner, or even the need to tend to a family emergency. The succession plan will outline the strategies necessary to keep the business running in the owner’s absence.

A permanent departure could come about as a result of the disability or death of the owner, the desire to sell the business, or the need to buyout a partner. In that case, various plans would need to be in place that would enable the business to continue.

The owner may decide that the business should be passed on to a family member, a business partner, or even a key employee. The succession plan outlines the transfer of ownership from the owner to whoever that person is.

Exactly how succession planning is structured will depend upon a number of factors. This will include the type of business, the owner’s level of involvement in the business (remote owner or hands-on manager), the potential successors, and whether or not the owner wants to keep the business in the family after his or her departure.

A business succession plan also needs to be updated on a regular basis. As a business expands and its operations become more complex, additional contingencies will need to be planned for.

Why You Need a Business Succession Plan 

Whether the business owner is disabled, or wants to transfer the business to another party, there will be a need to minimize business disruption. The business will need to maintain cash flow, on-time payments of expenses and taxes, as well as cover payroll. Furthermore certain events, like a business owner passing away, can trigger liquidity events that may have significant personal or business tax implications or could force the sale of your business if not thoughtfully considered in advance. Succession planning will provide strategies to deal with each of those situations.

It will also help to lay out a specific strategy to “groom” a successor who will take over the business. This could be an inexperienced family member, a business partner, or an employee. The person may have some familiarity with the business, or at least some aspects of it, but will need to be trained in the entire operation. That will take time and specific training efforts. Those can be spelled out in the succession plan.

Just as important, a succession plan will help to determine how business obligations will be handled in the absence of the owner. This can include debts that the owner is personally responsible for, tax liabilities, or special business relationships with either vendors or clients. The succession plan will provide a strategy to deal with each.

But one of the biggest benefits of a succession plan is preparing the business to be sold so that the owner can retire.

Retiring from a business is much more complicated than retiring from a job. The business owner must prepare the business for his or her departure. That will take time, as well as a series of strategy implementations.

The plan can lay out the timetable and the specific strategies needed. It can serve as a roadmap to retirement for the owner. Every small business needs to be prepared for at least that eventuality.

Getting Help with Succession Planning

A succession plan isn’t something that you can write up yourself. There are just too many contingencies to be aware of, as well as legal and tax considerations. Fortunately there’s plenty of help available on this front.

There are actually business succession plan templates that you can get on the web, simply by doing a web search on the term “business succession plan template”. But even with a template, it’s still likely that you’ll need professional help.

Some sources of that help include:

Your bank. If you have a business banking relationship, your bank will have an intimate knowledge of the inner workings of your business. They may not be able to prepare a succession plan for you directly, but they can provide you with direction as to what you should consider, and what professional advice you need to obtain.

An attorney. It will be hard to come up with a comprehensive succession plan without input from an attorney. That person will know the laws in your state, as well as the potential contingencies that you will need to be aware of. A succession plan must be legally compliant, particularly upon either the death or the retirement of the business owner.

A CPA. If you have a small business, you probably also work with the CPA. But that same person can be important in preparing your succession plan. They are familiar with the financial situation in your business, and can be an invaluable resource. They can also help you to minimize tax implications involved in the transfer of your business.

Business consultants. It often helps to get a third-party view of your business from someone who is familiar with your business field. That person can make suggestions as to how to handle the transfer or sale of your business, as well as strategies to keep operating in the event that you have to make a temporary departure. A business consultant may also be able to help you in the direct sale of your business, when the time comes.

An estate planner. This person would be invaluable if your plan is to ultimately transfer the business to family members. While you may hope to do that for retirement, it’s possible that it will happen involuntarily through your death. An estate planner will know how to effect that transfer to your family, with a minimum of disruption and stress.

If you own a business, you absolutely need to have a succession plan in place. Start the process by talking to someone at your bank, and then go forward from there. A succession plan is all about preparing for contingencies. The sooner that you draw up a formal plan, the easier it will be for you to deal with whatever comes your way.

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