Five ways to put the “success” in succession planning
As a small business owner, deciding when and how to step away from your closely-held company can be one of the most difficult choices you ever make. Whether by choice or by circumstance, when the time comes for a business owner to hand the reins over to someone new, this process should never jeopardize a lifetime of hard work.
In most closely-held businesses – those that are controlled by a small number of owners who manage most or all of the company’s operations – succession planning is pushed to the back burner. Owners tend to focus on day-to-day challenges and business survival, and the idea of passing the company on to someone else is often the furthest thing from an owner’s mind.
However, failing to have a solid succession plan can spell disaster, particularly if an owner is forced to relinquish control based on unexpected circumstances, such as a sudden life change or an untimely death.
Having a thoughtful, complete succession plan in place is the best way for retiring owners and new owners to improve the odds that a company will continue to thrive following a change in ownership. These five steps can pay big dividends for both parties involved in the transfer.
1. Develop and communicate a strong transition plan
A transition plan lays out every aspect of a change in ownership, including the timing, circumstances, leadership structure, contingencies and other details. Promptly communicate plan details to all interested parties. Include managers and key employees to help iron out potential problems before the ownership change is executed.
This is particularly the case when the transfer is financed by a bank since lending institutions often require a detailed transition plan as a condition of underwriting a loan.
2. Settle all financial and transition issues ahead of time
After determining the price and timing of a transfer, both parties must also agree on how the transfer will be financed, as well as contingencies for the unexpected.
In some cases, it may be necessary for the retiring owner to retain some role in the business. This is often the case when the retiring owner has forged significant business relationships with customers, vendors, creditors or other crucial entities. In these cases, it is paramount to clearly define the retiring owner’s role in the business after the transfer.
3. Don’t ignore emotional issues and concerns
While it can be hard for a retiring owner to give up control of a business they built from scratch, the new owner must have a chance to explore new ideas and offer a fresh perspective. This can be particularly challenging when a retiring owner feels that the new owner may be making a mistake. However, in most cases, it is best for the retiring owner to allow the new owner to make their own decisions and learn from their mistakes.
It is also important to remember that emotional considerations are not confined to the retiring owner. Family and close friends may also be affected by such a significant life change, especially in family-owned businesses. Talking through these issues ahead of time can not only help ensure a smooth transition for the firm but also help protect family relationships.
4. Plan for a wide variety of legal and accounting issues
Sorting through the maze of financial matters, such as business valuation, tax planning, investment management, life insurance and other considerations can be a challenge even for a seasoned professional.
Consult with a qualified and competent financial adviser to help prevent potential difficulties that may not be apparent to the untrained eye.
5. Work to limit risks for both parties following transition
The knowledge and work ethic of a small business owner are often the most important factors in building a successful company. However, in many cases, it can be difficult for a new owner to step in and replicate that success.
Neither party benefits when a successful company ceases to be profitable following a change in leadership. Both sides should work together to ensure key business relationships are maintained and definite guidelines established so the new owners can build upon the groundwork created by the retiring owner.
Edward J. Straley is a principal at Boyer & Ritter LLC and has over 30 years of experience providing accounting, auditing, tax and management consulting services to a variety of clients and industry groups. He works in the firm’s Chambersburg office and can be reached at 717-264-7456 or email@example.com