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business succession

Business Succession Planning

business succession

Preparing your business to be successful should include succession planning, no matter the size of your business. Whether you’re a sole proprietor or a multinational corporation, ensuring business continuance in the absence of current business owners or key stakeholders is as important for the business and employees as it is for your customers.

Defining a Business Succession Plan

A Business Succession Plan is a document that provides step-by-step instructions for a change in ownership of a business usually resulting from the retirement of an owner but also in case of death or disability. This guide outlines logistical and financial decisions about who will take over the business in order to relieve stress for the departing owner’s family and business partners and prevent monetary loss to the business.

A well-written business succession plan aims to benefit everybody—the departing owner, the business, employees, and the successor—and ensure operations continue so clients don’t experience a disruption in service. Every business needs a succession plan, but the closer a business owner gets to retirement age, the more urgent the need for it.

Be proactive and don’t neglect this important step in your business plan like many businesses do.

How to create your Business Succession Plan

Step 1: Create a Succession Timeline

Define the circumstances when a succession would take place, either on a predetermined date or in the event of death or disability of business owners or key management.

Step 2: Identify Potential Successors

Write a list of potential successors (consider three or more) along with a profile including strengths for consideration.

Step 3: Formalize Your Standard Operating Procedures (SOPS)

Collect documents, procedures, employee handbooks, any training documentation and organize them into a process for your successor.

Step 4: Perform a Valuation of the Business

Updated frequently, this provides the most up-to-date value of your business, which would determine selling price, agreements, etc.

Step 5: Decide Funding for Succession

Detail how the transfer of ownership will be funded (life insurance, loan, other seller financing, etc.)

A well-crafted succession plan identifies the ideal successor to take over the business, or in the event of a purchase, clearly outlines the purchase terms and sale price.

In the case of multiple owners, it often involves a buy-sell agreement, secured with a life insurance policy or loan, so the death benefit passes to the remaining owners and pays for the deceased owner’s share, based upon the predetermined value of the business.

Five Common Ways to Transfer Ownership of Your Business

These options provide a lot of flexibility in how you want to determine the transition of ownership of your business.

  1. Selling your shares or ownership interests to a co-owner.
  2. Passing ownership interests to a family member or heir.
  3. Selling your business to a key employee.
  4. Selling your business to an entrepreneur outside your organization, which can even be a competitor.
  5. Selling your ownership interests back to the company to distribute to remaining owners

As a business owner making succession plans, you should decide who is most capable of running your company. You can even decide to give a few qualified individuals responsibility for parts of the business that fit their interests or experience if you have multiple successors identified.

Prepare the Successor for an Easy Transition

Do a trial run of your succession plan and have a potential successor assume some responsibilities of a manager who is taking a vacation (not when there is a staffing crisis). The employee can gain valuable experience while you assess where they might need additional development. A mentoring relationship can also groom your successor to be a quality leader, so your business continues to run successfully without you.

Get the Appropriate Financial and Legal Support

Depending on the size of your business and how complex the finances, you may work with a local CPA and/or a business attorney to ensure everything goes smoothly when the succession plan is activated. For more complex businesses, an accounting firm with extensive experience in succession planning may be a better option to help determine the right amount of insurance, a buy-sell agreement, and valuation techniques to reduce taxes.

With the proper help, every detail of your business succession strategy is documented, just make sure to share this document with all interested parties–especially family members or business partners–so that it is easily accessible when needed.

A helpful resource guide for Business Succession Planning provided by the SBA.

Explore Your Financial Options

Learn more about how HOMEBANK can help you with your business deposit and financing needs. Let us help you achieve your business dreams by making an appointment to speak with a banker about your business banking needs or call us toll free at (855) 577-2001.