You probably are keenly aware of the dismal statistics to keep a business alive and thriving. Nearly half of all companies fail in the first five years. When you add another five years, just over a third are surviving.
As a business owner, you’ve spent countless hours working to make your business successful, to make it survive. So, it’s probably hard to think about what happens with the company when you’re no longer involved with it.
For many business owners, a business succession plan might feel like tempting fate. It might also feel like something that won’t be needed until far off on the horizon.
Yet, part of carefully caring for your business is also knowing its fate when you’re no longer in the picture. Sometimes that means you choose to leave on your own fruition. Other times, life throws unfortunate curve balls that you don’t expect.
Creating a succession plan for your business means you’ve done all the preemptive planning you can to secure the business and make a plan for it into the future.
Read on to learn more about the five Ds that can impact a succession and how to approach preparing your business succession plan.
Before we dig into the how of business succession planning, let’s consider the why. What might precipitate the need for succession in a business? Many of them begin with the letter D.
Some of the Ds you can control, while others are the kind that can happen unexpectedly. A solid business succession plan helps you to prepare for either option.
As a business owner or manager, you have many responsibilities, not to mention the people who rely on you to make smart, solid decisions.
What happens in the event of a disability that impairs that ability? Disability can come from:
In the case of disability, a business wants to have a panel of trusted individuals charged with making the tough call when to have someone step in.
Divorce can be messy and expensive, and highly impactful on a business. This is especially true if the divorce involves the principal(s) or the partners of the principal in the business.
When divorce occurs and is tied to business ownership, things can get complicated. Often, the proceedings are connected to state laws to navigate which demands careful, preemptive planning.
Divorce can impact the:
This is probably one of the most challenging possibilities to plan for. Nobody wants to anticipate a marriage failure and how it might impact a business far down the road.
Departure is likely how most business owners imagine their business succession plan will be executed. This means they are controlling that they choose to:
In most cases, business owners imagine a departure as a voluntary choice to step away from the business. As part of the succession plan, they decide what will happen when they choose to step away.
Dissolution means the business is ending. It means the owner is opting to close or end all aspects of the company.
A lot can depend on the business structure when you consider dissolution as an option. If a business was organized as a sole proprietorship, it must be dissolved if the business owner steps away or dies.
An owner could opt to dissolve a business, but in reality, if it has any value, there are likely other options.
So, what happens to your business if you die? Some assume that their business can carry on without them.
And that might be true, but how does that happen? Can the company afford to continue once it deals with the financial obligations of your death?
You should consider whether your business can:
Also, you need to consider whether the people who inherit your assets want the responsibility of the business.
So, while you can’t plan when you die, you can ensure your business succession plan covers what should happen when you do pass away and if and how the business moves forward once you’re gone.
As a business owner, you probably have spent hours writing and revising your business plan to help keep your business thriving.
However, most business owners don’t go far enough in crafting their business plan. They stop planning just before they consider what happens when they aren’t a part of the business.
As a result, they have a well-developed business plan but fail to complete the succession plan.
Nobody plans to die suddenly in an accident or to become suddenly ill. What happens if suddenly you’re unable to handle the responsibilities of your business because of an unexpected event?
What would you want to happen to your business? Think about the critical questions your business would face going forward. Ask yourself:
You want to make sure that the people who’ve been assigned the responsibility of handling your affairs know what to do.
You likely know every aspect of your business. You can cite numbers and see every detail. Often the problem lies if those details are all securely stored in your head.
You might have people you trust and employ who know these essential details.
An important part of a succession plan should be where vital information and details are secured for the person charged with jumping into your shoes should it be necessary.
Does your business have co-founders, investors, and employees who have a vested interest in your business? Do other people own shares or a percentage of your business?
These people need to be a part of the succession plan. Or, at a minimum, you need a shareholders agreement that spells out what happens if they die or want out of their shares.
Your shareholder agreement should spell out what happens to their shares if they die. How is their share of the business handled?
This can be highly impactful to your business if you don’t know what could happen to those shares.
Sometimes businesses that lose their owner face a period of profound uncertainty. This is especially true if careful planning hasn’t been organized.
As part of a succession plan, owners will often take out an insurance plan for founders or key executives that’s payable to the company in the event of the owner’s death.
This gives the business the needed capital to ride out the uncertainty and transition following the owner’s death. It provides security and alleviates any tension about how the company might move forward financially.
So, let’s look more specifically at what you need to do to prepare a succession plan for your business. You first need to know the value of your business to you and others.
Understanding this can help you get a clearer picture of what to do with your business when you aren’t a part of it.
Many business owners hope to work in their business until they’re ready to retire.
If this is your goal, you need to consider how long you’ll need to work to have enough money for retirement. You’ll want to consider what the business might be worth and how much of your assets are actually tied up in the business.
This is where it’s crucial to work with a professional. The wealth management specialist can help identify how much the business might be worth and how much you need from the company when you’re ready to retire.
You will want to carefully consider having some of your assets outside of the business. This gives you more flexibility as you approach retirement.
There are really three things to consider with successors. You could pass the business to a family member, another employee, or an outside third party.
You need to give honest and thoughtful consideration to whether a family member or even an employee is prepared to take on the reins of the business and if they want the responsibility of this role.
The third-party consideration will be why it’s so important to know the value of the business.
After considering your retirement goals and successors, the next step is to create your personal estate plan.
Your estate plan spells out your wishes and intentions for assets. This matters because your assets are often connected to the business. Your successors could be family and also a part of your estate.
The lines can get complicated here, so your finances must be spelled out in the estate planning.
We touched on the importance of an emergency plan earlier. Of course, you can do all the planning in the world, but emergencies can still arise.
As part of your business succession plan, you need to have an emergency plan. Ensure your succession plan spells out a careful and methodical transition.
The emergency plan should spell out how to move forward if you leave the business because of an emergency.
You need to consider the current corporate structure of your business. You’ll want to consult with your accounting, investment, and legal team about the design of your business.
Are there any changes needed to make the transition a smooth one? Is transferring business assets necessary to make sure the succession goes smoothly?
Then have the whole team put together the succession plan documents so that the succession plan can be executed as planned with everything in place for the correct people to take over.
As the business owner, if you’ve worked through each of these steps, you need to spell out the transition plan.
This is a detailed plan that elaborates how the organization will transition from you as the business leader to someone else taking the reins.
Identify all the key players who will be a part of the transition. Get them involved in the process. Spell out a timeline and the responsibilities each member of the transition will take on.
Consider any training or leadership development that’s needed. Make sure all the legal and financial documents are in place.
Make sure your emergency plan spells out long-term succession plans.
If it’s your goal to sell the business, prepare it for sale. Talk to your accountant and financial advisors about what you need to do to make the company a lucrative prospect for buyers.
Creating a concise business succession plan requires careful consideration and planning. As the business owner, you need to know your own goals; you shouldn’t go through this process alone.
To build a successful business, you likely trusted various professionals to support and guide your business. These same business advisors should be part of planning your succession plan.
You need their perspective, insight, and expertise.
You have likely spent years working hard to build a successful business. You need to have a plan for leaving that business and get your interest out of it.
If you need guidance creating a business succession plan, we can help. Contact us today to get started planning the future of your business.
“SSC CPAs + Advisors” and “SSC” are the brand names under which SSC Advisors, Inc. and SSC CPAs, PA provide professional services. SSC Advisors, Inc. and SSC CPAs, PA practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. SSC CPAs, PA is a licensed independent CPA firm that provides attest services to its clients, and SSC Advisors, Inc. entities provide tax, advisory, and business consulting services to their clients. SSC Advisors, Inc. is not a licensed CPA firm. Our use of the terms “our firm” and “we” and “us” and terms of similar import, denote the alternative practice structure conducted by SSC Advisors, Inc. and SSC CPAs, PA. Advisory services provided through Wealthcare Advisory Partners, LLC doing business as SSC Wealth, LLC. Wealthcare Advisory Partners LLC is a registered investment advisor with the U.S. Securities and Exchange Commission.