As someone who has invested years and efforts into running their own business, іt can be hard tо imagine what will come after you step away from it. Whether selling the business off tо new ownership оr passing іt down through family heirs іs your goal, developing a succession plan should not be neglected.
With expert estate and business succession planning іn place, you can ensure a smooth transition and protect your business’s future. Without an effective business succession plan, customers could take their business elsewhere. Here are the essential steps for developing one.
Identifying Your Successors
As part of any business succession plan, identifying potential successors is the initial step. While this may be daunting for some owners who may be unwilling to contemplate leaving their business behind, a strong succession plan is crucial both to its future viability and that of its employees. A solid succession plan will allow business owners to transition out quickly while alleviating stress for all involved and ensure the company thrives after they depart.
Identification of potential successors typically takes the form of performance reviews and discussions among co-workers, with the objective being to find employees with the necessary skills and abilities for higher-level roles like management. When reviewing current performances of employees as potential replacements, pay particular attention to how well they collaborate with colleagues as well as their openness towards learning new skills and taking on greater responsibilities.
Once a company has identified potential successors, its next step should be to establish individual development plans and training opportunities for them. This will give successor candidates an opportunity to advance their skillsets and increase their odds of success. In addition, mentorship programs should also be set up along with collecting regular feedback on candidate performance so the company can assess whether they are on target to meet its succession goals.
Developing a Training and Development Plan
As business owners near retirement age, thoughts may shift towards what will become of their company they have built from scratch. Concerns can include how knowledge, skills and experience will be transferred onto someone else who will run it as well as any consequences this has for employees and customers.
Many owners opt to select their children as the next leaders, though there are other viable solutions such as choosing trusted employees or co-owners, professional advisors or selling to an outside buyer. No matter which path is taken, having a well-planned succession plan in place signals longevity for both business and family alike.
Formulating a training and development plan will enable your successors to have the experience, education and leadership capacity required for success. Evaluate existing employees to determine who possess the appropriate skill sets for higher-level positions before initiating training and mentoring programs aimed at filling any gaps that exist within their candidates’ resumes.
Funding should also be carefully considered. When selling your company, a buy/sell agreement must be created and implemented to ensure you obtain the maximum price while also addressing any potential future problems that may arise. Your funding method depends on individual circumstances; options include life insurance policies, internal lines of credit or an Employee Stock Ownership Plan (ESOP).
Establishing a Timeline
When transitioning, having a clear timeline of steps is critical to ensure responsibilities are redistributed equitably and training begins promptly, without confusion or disruption to your business.
At the core of any successful succession plan lies selecting a trustworthy successor who is ready and capable of taking over – this could be family members, key employees or an outside 3rd party. Furthermore, it’s also essential to consider terms for transferring ownership as well as unexpected situations like incapacity or death that arises as part of this plan.
An evaluation should be carried out of potential successors to assess their abilities, education, experience, and leadership potential against the vision of the company. Multiple people should participate in this evaluation process so any gaps can be quickly identified.
Timing will depend on several factors, such as profitability and how quickly a buyer can be found. For instance, highly profitable businesses will likely have higher valuations, making finding buyers faster easier; on the other hand, struggling or financially unstable businesses might struggle more to attain fair prices, leading to longer sales transactions.
Creating a Buy/Sell Agreement
A buy/sell agreement is a legal document that details what will occur when an owner leaves or dies, so it is wise to establish one at the time of business formation and revisit and update it regularly.
Key components of an effective succession plan should include defining what constitutes a “triggering event”. Examples could include death or departure of partners, bankruptcy of individual owners or business dissolution. It should also outline funding methods including life insurance policies, trusts or other assets.
Based on their objectives, clients may wish to draft either a cross-purchase or entity-purchase agreement. A cross-purchase agreement provides an avenue for purchasing deceased owners’ shares without incurring costly battles between their heirs and estate and business continuity. An entity-purchase agreement allows businesses to directly acquire departing partners or shareholders’ shares without resorting to probate and can make funding easier because funds come directly from within the entity itself instead of individual shareholders.
If a company’s business is unprepared for transition, its future could be at stake. Hiring an experienced professional advisor can ensure its survival as you wish.
