Ownership and Management Succession Planning
Ideally, succession planning is divided into two main categories: ownership succession and management succession.
Ownership succession
Since the primary value in most small businesses is in their relationships, there must be a structured plan for transitioning those relationships to the successor owners. This isn't something that happens overnight, so planning for ownership succession ideally should start at least three or four years before the owner plans to leave the business.
Management succession
The key to successful management succession is to build a strong successor management team well in advance of your planned (or, in too many cases, unplanned) departure from the company. If yours is a family business, you must objectively determine whether or not your heirs are being adequately prepared to lead the company after you're gone, or if they even want this responsibility.
Questions to Consider
Here are a few questions to consider as you begin thinking about formalizing your succession plan:
Have you defined and articulated to others your personal goals and vision for the transfer of ownership and management of the business?
Ideally, your goals and vision should be communicated clearly and unambiguously in a formal written business succession plan that addresses both management and ownership succession.
Is your successor identified and ready?
This may seem like an obvious step, but it's one that's often overlooked. Many companies have only an interim succession plan prepared for dealing with the sudden death or disability of top leadership.
Is there a buy/sell agreement in place?
A buy/sell agreement is an essential part of ownership succession planning for closely held companies. It creates an immediate market by which any owner's interest can be translated into cash through the buyout of that partner's shares by the other partner(s). There is usually a valuation formula tied to the agreement that creates the immediate market.
Are you dependent on the business for retirement cash flow?
For most owners of family and closely held businesses, the sale of the business represents their primary source of retirement income. It is essential that you work together closely with estate and personal financial planning experts who can help you plan the financial side of succession so that it provides a comfortable stream of income to support your desired lifestyle during retirement.
When done properly, succession planning may take months, if not years, to develop and implement. This process is crucial, however, to ensure the years of hard work you've put into building your business are not wasted.
