Thinking about the future can be daunting. But when it comes to running a small business, it’s imperative.
After all, you’ve poured your heart and soul into setting up your business. A considerable amount of time and resources have gone into getting it off the ground and nurturing it into the thriving company it is today. So have you considered what will happen if you can no longer run it yourself?
Naturally, you want to guarantee its long-term success when you hand over the reins. Creating a succession plan can help your business thrive after you leave, giving your team much-needed stability.
This article will explore how, why, and when to create a small business succession plan and what you should include. Let’s dive in.
What is a small business succession plan?
In short, a small business succession plan is a document that details what should happen to a business if the owner is no longer able to run it. It considers expected and unexpected events, including retirement, illness, or death.
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The plan outlines the chain of command, who will take the helm, how this will occur, when, and under what circumstances. You can also include information such as brand identity guidelines and practical tips for running the business.
Some succession plans will automatically give the business to a family member, while others will specify a designated person outside of the family. The owner might also sell the company to a business partner, staff member, or someone outside the company.
A good succession plan will also include an assessment of the business in its current state, followed by a plan for the company’s future. This will help your team determine what skills will be needed to carry the business toward its goals.
Why business succession planning matters
The great thing about small businesses is that one person is often responsible for running the show. They are the architects of the business. Chances are they work hard to share their passion, establish a positive work environment for employees, and add value to their community.
However, there is a downside to having one person at the helm: they aren’t easy to replace. Bigger businesses will have multiple people doing similar roles who are familiar with what everyone else does. But smaller businesses might have fewer roles and more niche responsibilities.
Perhaps the business owner has a unique accounting method or a confusing scheduling system. Perhaps they retain significant information in their head or are the sole team member with access to your website builder.
In these circumstances, it seems quite obvious why you would need a succession plan. Let’s explore a few of the main reasons in more detail:
- Continuity: Having a plan in place allows for a smoother transition from one owner to the next, taking into account average time to fill. This allows customers, fellow team members, and other stakeholders to feel reassured that the business will continue uninterrupted.
- Business value: If you don’t have a plan in place in the event of an unexpected event, it could lead to chaos. The team could miss orders, causing customers to take their business elsewhere, while unhappy employees may end up finding new jobs. A plan keeps your business valuable to everyone.
- Financial security: Having a solid strategy prevents your business from being sold off at less than its value by having a clear inventory of assets and evaluations of these.
- Succession protection: A succession plan allows you to designate who you want in charge of the business after you leave so the business doesn’t fall into the wrong hands or move in the wrong direction. It can also simplify inheritance matters in the event of a divorce for the person taking on the business, for example.
When should you start?
Every business is unique. So, there’s no standard, cookie-cutter answer to this. However, a rule of thumb is to start around five years before the owner aims to retire or sell their business. If you start earlier than that, great! But remember, you may have to revise the plan in the future.
So, why five years? This time frame allows flexibility and changes to the plan while remaining on roughly the same trajectory. Since selling a business can be emotionally difficult, planning ahead gives you time to process your feelings and make sound choices for the business and company values.
For many people, their business is like their baby. Letting go when they’re grown can be tricky. So planning early can help ease you through this process.
What to include in a small business succession plan
In this section, we will cover a few things that you can include in a small business succession plan.
Successorship
Your successor is the person who will take over your role after you move on. This can be someone in your family, a key employee, or someone else entirely. If you decide to designate a successor in advance, you can prepare them by teaching them everything they need to know about the role.
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The student becomes the master, grasshopper. By mentoring this individual or giving them the tools they need to succeed, you ensure the business is in good hands.
Liquidation
You might want your business to end with your departure and liquidate your assets. This gives you the option to take the money for a secure retirement, invest it, or leave the money to someone who can benefit from it in the future.
Debt
Many businesses will have been made possible through loans and credit. When the owner moves on from the business, those loans are still there. Banks can recuperate this money through liquidation or a loan repayment plan involving the person who inherits or buys the business.
A good succession plan will detail how this debt should be managed and what funds and assets are available to repay the loans.
Taxes
If you’re tax savvy, you can save the future business owner from having to pay too much tax by taking advantage of gift-giving exemptions and tax relief systems and conducting an internal audit ahead of time.
5 types of successions plans
There are several types of succession plan you can choose from, so make sure you choose the right option for your company and team.
- Trust
Your business involves physical property, interest shares, and the running of your business. You can use a will or trust to pass down your assets to a person or multiple people of your choice.
In addition, you can choose to give business interest and your role as head of the business to two different people. Or, you could specify that the company be sold after your death and choose someone to inherit the proceeds.
- Buy-sell agreement
With a buy-sell agreement, you can agree on a sale ahead of time with a third party. The sale comes into effect when a certain event occurs, such as the death of the owner. The price of the sale is agreed at the time of signing – this might be a fixed price or follow market fluctuations.
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- Sale
Another option is to sell the business before you leave. You can sell your ownership interest to someone else and take a backseat in your company, letting someone like a key employee with the right knowledge and skills take the reins.
This way, you can start a successful transition to a new leader while you’re able to provide support and impart your expertise, whether it’s tips on upselling or taking a business loan.
- Operating agreement
An operating agreement is legally binding. Often used when a company has several owners, the document lays out how the company is to be managed to ensure a smooth transition. This can cover anything from financial planning to chain of command and internal policies.
- Organizational chart
Everybody likes a nice flow chart. They show exactly what needs to happen in any event. In much the same way, you can document the processes of your company, chain of events, and everything an employee needs to know when you leave.
That way, your team will have a handy guide for the business journey, whether you make this available as an interactive pdf online or printed guidebook. Instead of having to play a guessing game, your team will feel confident in handling everything from accounts to inventory going forward.
Final thoughts
Small businesses are unique and special, grown from someone’s passion to deliver value to customers. But they often lack the resources of a larger corporation, making business succession planning vital.
A small business succession plan will give you peace of mind that your business will continue to be nurtured after you’re gone. Determining the chain of command and potential successors and outlining the process for transferring ownership will ensure a seamless transition.
Your plan might include a clear assessment of business operations, a business valuation, and plans for its future. As well as successorship, you can also cover liquidation options, debt management, and taxes. This way, future owners or potential buyers will be able to hit the ground running.
So, if you haven’t already, start putting together your business succession plan today, and set your team up for business continuity.
Author: Jesse Liszka
