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How To Safeguard Your Legacy With Succession Planning
In 1958, the lifespan of companies listed in the Standard and Poor’s 500 was about 61 years. Nowadays, they only last for a paltry 18 years.
Establishing and running your own business is hard work. That’s why owners often feel the need to set up detailed succession plans. They want to protect their business well into the future.
Contrary to popular belief, succession planning isn’t only for family businesses. It’s suitable for any business owner looking to ensure the success and continuity of their business through death, retirement, or other unexpected circumstances.
However, succession planning is somewhat of a murky subject for most business owners. Read on to learn how to plan your business’s succession, ensure its continuity, and protect your legacy.
How Does Succession Planning Work?
A succession plan or business continuity plan is an official document that outlines the change of business ownership in the event of retirement or other untimely events. The succession plan will detail the purchase terms, sale price, and additional crucial information should you decide to sell the business.
The ideal succession plan will ensure the seamless transition of business ownership and benefit all parties, including the departing owner, the new owner, the employees, and most importantly, the business.
A typical succession plan checklist should include
A list of potential successors: Any succession plan should contain a list of possible successors who are likely to take over the business when you retire. The list should also detail the potential successors’ strengths and order of preference.
A business valuation: A business valuation is a detailed breakdown of your business’s economic value. Apart from the actual business value, the valuation should also explain the valuation method. You should also update the valuation as frequently as possible.
Standard Operating Procedures(SOPs): Standard Operating Procedures or simply SOPs are a set of processes companies have to ensure the smooth running of company operations. SOPs are written and handed to managers and execs to provide formal and well-coordinated business operations and activities.
A succession timeline: This is a breakdown of when the succession and ownership transition will take place. If you can narrow it down to specific dates, the better it is for your succession plan.
Your succession funding plan: A lot of cash must change hands to ensure a smooth business succession. A succession plan should also include how you plan to fund the succession. A few viable options include life insurance, bank loans, among others.
When to Create a Small Business Plan?
Every business needs a succession plan, but is there a right time to create one? Well, there’s no specific period for starting a business plan. However, the best time to make a business succession plan is as soon as possible.
You may have a solid plan on when and how to leave your business, but not everything goes as planned. Events like unexpected illnesses, accidents, or sudden death may interfere with your business retirement plans. To be on the safe side, create a succession plan as soon as you can and ensure your business’s continuity should the unexpected happen.
Who Creates a Succession Plan?
Seems pretty simple right? Everyone knows that the business owner creates the succession plan. While that much is true, remember most businesses have partnerships and co-owners. In such cases, the succession planning process tends to be a lot more complex.
The greater the number of co-owners, the more detailed your succession plan should be. You should consider creating a succession plan if you fall in any of the below categories.
You own a business with employees: You need to pick a successor who’ll take charge of employee relations should you retire or pass on. This successor will handle employee issues like payroll, employee management, and human resource operations.
Your business involves complex operations: If you run a business that requires complex operations, you’ll probably need someone to take over these operations when you exit the business. A succession plan ensures the new owner understands the business processes and knows how to continue them.
You have loyal customers or clients and ongoing projects: You can’t afford to lose your loyal clients and customers once you exit your business. That’s why you need a succession plan to ensure your business’s continuity and serve your customers like you never left.
You need to finish any ongoing projects with your clients, regardless of whether you’re retiring. Failing to do so may open up a barrage of lawsuits that may run your business to the ground. A succession plan ensures that your business completes any ongoing projects or contracts.
You’re thinking of a successor: If you already have a successor in mind, you best create a succession plan to formalize your decision. That way, you can leave your company in safe hands should you retire or anything unfortunate happens.
Most business owners make the mistake of creating a business plan when they’re near retirement. While this makes perfect sense, doing so could put your business in chaos should the unexpected happen way before your retirement.
If you want to play it safe, consider creating a succession plan early on to protect your business’s future interests.
Types of Succession Plans
No two businesses are the same, and a succession plan that works for one company may not work for another. Given the numerous scenarios that businesses might change ownership, there are many types of succession plans. There are three main types of succession plans.
Passing Your Business to an Heir
This is one of the most common types of business succession plans, especially for family businesses. It ensures that you can provide for your family, even when you pass on. It’s also a great way to ensure a long-standing legacy.
If you’re looking to pass on a business to an heir, you should consider:
Providing clear and candid instructions: It’s a good idea to provide clear instructions on how you want the company to run and ensure its continuity and success.
Picking a specific successor: You need to consider who’s fit to take over the company. This can get complicated for families with multiple children or other interested family members.
Creating a future leadership structure: It’s not uncommon for company execs or co-owners to push your heir out of the company. That’s why you need to determine a future leadership structure that puts your heir at the top. It’s also a good idea to seek legal advice from the right people.
Selling Your Company to a Partner
If you own a business with a few co-owners, you might want to consider selling your business to a partner. In fact, most partnerships agree that should one owner pass on, the remaining parties will purchase the business interest from the deceased’s next of kin.
This succession plan ensures a smooth ownership transition because the partners are already familiar with the processes. It also eases the burden of family heirs who may not have any interest in the business. It ensures the next of kin gets compensation, and the company runs as usual.
Selling Your Company to an Employee
Some business owners decide to sell their business to their most trusted employees. However, business owners must ensure they pick a dedicated, experienced, and respected employee. They must also ensure the employee has enough business acumen to run the company.
A trusted employee is a much better business successor than an outsider, especially for small businesses. You can use an organizational chart to help you pick the right employee. This succession plan ensures the continuity of your business and standards are maintained.
Creating a Concrete Succession Plan
Building your succession may seem like rocket science, but it really isn’t. You can create your succession plan in five easy steps.
Step 1: Create a Timeline
The first step is creating a timeline of when you’d like the succession to take place. For example, you can pick a specific date or an event like your death or disability.
Step 2: Pick Your Successor
The next step is to pick a viable successor who’ll take over the business. You can either select a family member, close colleague, co-owner, or an outsider you can trust
Step 3: Formalize Your SOPs
We already talked about standard operating procedures. Now it’s time to formalize them to ensure a smooth transition to the new ownership.
Step 4: Business Valuation
After your SOPs, you have to figure out how much your business is worth. This helps you set a fair price for your business if you’re willing to sell it. Before selling your business, talk to your attorney to avoid getting the short end of the stick.
Step 5: Finance Your Succession
For the last step, you’ll want to explore the different financing options for your succession plan and pick the most suitable one. You can use life insurance, a bank loan, or any other appropriate funding option.
The Future Is in Your Hands
Succession planning is the surest way to safeguard your business’s future ages after you exit it. The above information and succession planning checklist should help you create a solid succession plan for your business. That way, you can safeguard our legacy and leave a long-standing mark in the business world.
You’ll need a competent and experienced attorney to walk you through the entire succession planning process. Contact us today so we can create a solid succession plan to ensure the continuity of your business.
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