How Succession Planning Can Help You Protect Your Business's Future
You've nurtured your business for years. Of course, you'll want to ensure it continues to thrive when you're no longer involved in the day-to-day operations. Succession planning is key to your business's ongoing success and longevity. This process involves identifying who will handle operations when you're no longer at the helm. It helps ensure the business remains viable and provides you and your family with the investment return you expect.
The best succession plans not only outline what you want to occur and when, but also provide a set of actions to take. In addition, they consider a variety of what-ifs to provide flexibility— for example, if you choose to partially or fully retire from the day-to-day management before you fully hand over ownership. Forward-thinking business owners start the succession planning process early to preserve and grow their businesses while ensuring they have options.
How to get started with succession planning
Not all business owners have family members that are interested in taking over their companies or have the appropriate skills. Some owners sell their businesses to employees, business partners or competitors. Others sell company assets at sufficiently high prices to pay for all or a portion of their retirement needs. These owners purposefully choose to sell for various reasons they either know in advance or uncover during the planning process.
The first step is to identify a successor. Do you intend to pass the business on to your children or other family members? Does any family member who has expressed interest also have the drive and the business acumen? If not, have any of your key employees expressed interest in or shown affinity for the business? If the answer is no for all of the above, could you find and hire someone who has the skill set and interest?
It's human nature to want someone you love to embrace the business you built, but your kids' dreams and desires might diverge from yours. Even if your children have expressed interest, they may not have the initiative right now. If your child has the drive but not the right skills yet, mentor them to help their talent grow to the level your business truly needs. This also applies to any employee you're considering.
Planning will increase your business's value
Your business will be significantly more valuable the more it can operate as an entity separate from you. Accordingly, the business relationships, know-how and day-to-day decision-making need to reside within documentation, not just your head. This scenario reduces the risk for a buyer, as well as for an employee or a family member, because they can worry less about the business not delivering the same results once you're gone and feel more confident about its continued success.
The next step is people development. Having someone in charge who has the same characteristics that have already fostered the business's success will help maintain consistency. This means actually creating and implementing a training, education and mentoring schedule for your successor. From there, you can track and measure their progress.
Starting early will provide you with the necessary time. If you want your inexperienced, but determined, 22-year-old to take over, you may need a 10-year development horizon. However, if your 35-year-old is already involved in the business, you may only need a one-year timeframe. Whoever your succession candidate is, hold monthly meetings to review the financial statements so they understand the business's performance, and check in on any other tasks you've assigned them.
Be aware of potential barriers
One possible hurdle to overcome is competition among family or employees. Be sure to fairly vet all viable succession candidates. If you pass the business to multiple children, what will the ownership percentages be? Will you adjust roles based on each person's skills? If your business comprises the bulk of your net worth, you may want to sell the business to your successor and distribute the proceeds among your heirs. Consider when to sell and how to best structure the sale to reduce your taxes.
Will you utilize a trust? Although a 2019 IRS estate tax exemption minimizes the estate tax issue (often entirely) for most small businesses, if the transfer is improperly structured, the business, its assets or its sale proceeds could be tied up in probate for months.
Of course, there's a lot to think about in these matters. The objective, professional eye of a financial advisor might help you spot unforeseen issues, so you can better protect the investment you've made in your business.
Many entrepreneurs dream of a business that provides enduring value to their family and communities. Planning and implementation is how you ensure your reality matches your dream.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.