A business succession plan is an important component of any business strategic planning process. It is important for the following reasons.
- A poor management transition plan can have a negative impact on business results and can even result in business failure.
- The value of your business may represent a substantial source of income in retirement. Proper succession planning can therefore help ensure that risks to your retirement’s capital are minimized as you approach the end of your career.
- If you hope to leave your business continued by one or more family members, you will likely need to co-ordinate your business plan with your estate plan. You will also want to explore any tax deferral opportunities that could benefit you and other family members.
- An unforeseen event such as the death or disability of you or a business partner could lead to business chaos without proper planning and financial protection. Advance planning can therefore help ensure that you, your family and your business are all properly protected through good times and bad.
The Components of Business Succession Plan
1. Establish Goals and Objectives
The owner’s personal goals and vision for the business and his / her future role in its operation must be established. The establishment of clear goals and objectives provides a base on which the succession planning process will develop.
The items to be included are the following:
- Owner retirement goals
- Family member goals
- Goals of other stakeholders (partners, shareholders, employees, etc).
- Goals relating to what is to happen in case of illness or death of the business owner.
2. Family Involvement In Decision Making Process
Many of the problems that arise relating to inheritance, management and ownership issues will be alleviated when the family and all stakeholders involved in the decision-making process are kept informed of the decisions being made.
The issues to be addressed include the following:
- Process for handling family change and disputes.
- Family vision for the business.
- Relationship between family and business.
3. Identify Successor(s)
The issue of who takes over ownership and management of the business is addressed by this section. It includes the following items:
- Identification of potential successor(s).
- Training of the successor(s).
- Building support for the successor(s).
- Teaching successor to build vision for the business.
5. Estate Planning
This is important if the business owner is planning to retire or is taking a precautionary approach to the future of the business in preparation for being unable to continue operation of the business due to illness or death.
Estate planning is where outside advisors are necessary to ensure that all necessary issues are properly addressed to maximize benefits to the business owner. Advisors to be consulted include: lawyer, accountant, financial/estate planner and life insurance representatives. Each advisor will have their own area of expertise and will be able to provide necessary pieces of the puzzle.
The items to be considered in this section include:
- Retirement income
- Provision for other family members
- Active and non-active family members.
- Other financial considerations.
6. Contingency Planning
This has to do with “what if” scenarios and have a strategy outlined to deal with the situation if it arises. It will not be possible to anticipate every situation that may occur, but you can anticipate the more likely scenario and prepare for them.
A simple strategy may be to prepare a list of possible situations that could occur and from there identify what you would expect to do or have done.
This method will cause you to look for solutions in advance rather than having to react at a time of stress or duress.
7. Corporate Structure and Transfer Methods
This has to do with a review and updating the organizational and structural plan for the business. The goals previously established followed by the choice of successor(s) will factor into how the business should structure to the benefit of the owner and business itself. If it worked, the past, the strengths and weaknesses of the successor need to be considered and a structure should be established to take full advantage of the strengths and compensate for weaknesses. The items to be considered in this section include the following:
- Identify roles and responsibility
- Fill key positions
- Structure the organization based on who is to be the successor.
- Take into consideration any potential roles for the retiring owner.
- Restructuring due to the owner’s multiple roles
- Lawyer – to examine legal complication.
- Accountant – financial issues.
- Financier – to provide information to the seller.
8. Business Valuation
This step is taken to enhance the value of the business in order to make it more attractive to potential buyers while maximizing tax benefits to the current owner.
Some of the factors that impact the value of the business are:
- What is to be sold?
- Where is the business located?
9. Exit Strategy
This section addresses issues that have to do with the transition of ownership and removing yourself from day-to-day operations of the business. It involves the comparison of alternatives and a framework for how to make your final choices. These issues include the following:
- Transfer method
- Establish timelines
- The exit plan needs to be published and distributed to all persons participating in the succession process.
10. Implementation and Follow-Up
It will be necessary to review your succession plan from time to time. A well prepared plan will be done early and will require updating and revision as situation changes. It is a strategic planning document that must be dynamic and flexible. A specific period of the year must be set aside to examine the succession plan and assess its applicability and address any changes that may impact your ability to implement the plan as required.
At this stage of the planning process, you will be taking a final objective look at all aspects of your succession plan and determining your readiness and in many circumstances your willingness to proceed with successor.
At this stage, you may wish to identify some of the criteria you will utilize in making the final decision to start the process of implementing your decision to transfer ownership of your business.