4 Strategies for Better Succession Planning

You’ve created a successful business and enjoyed running but now it’s time to do something new. When it's time to hand over the reins of your company, a business succession plan can make the process flow smoothly and with considerably less drama than television would have you believe.

Why Have a Succession Plan?

It makes the transition process much easier when there’s a plan in place and provides a framework for your business to continue running smoothly and successfully. It will also help you understand and maximize the value of the business should you decide to sell it.

Here are 4 strategies to ensure a better succession plan.

Create Your Succession-Planning Team

Succession planning can take a long time, depending on the option you choose. You’ll want a solid team to help you during the process. You’ll need:

• A finance team to help you determine the value of and add value to your company
• A legal team to handle all the paperwork.
• Tax experts who can walk you through the process so you pay the appropriate taxes.
• A communications team to communicate the process internally to employees and externally to the media and industry peers.
• Your internal team may include your board of directors or long-term managers. You want people who understand the structure and financials of your business.

Understand the Different Types of Succession

There are four types of succession: you can sell the business to an unrelated third party, you can pass it on to a relative, you can participate in a management or employee buyout or you can wind down the company.

Selling the Business to an Unrelated Third Party

This is when a buyer from the same industry or an investor such as a private equity group expresses interest in your firm. The advantage of selling the business to a third party is that the value of the business can be preserved, so exiting owners can get their retirement funds out of the sale.

The disadvantage is that you may not get the true value out of your company. If you do decide to sell to a third party, take the time to get the value of your company. This includes understanding your industry, its future, and how that will affect your company in the short and long term.

This includes:

• Identifying any risks within the business and the industry.
• Providing a transparent view of the company and accurate financial information. This includes any changes that might affect EBITDA.
• Ensure that after-tax proceeds are maximized for both you and the buyer because no one likes a tax surprise.

Passing the Business to a Relative

If you’re passing the company on to family members there are unique considerations:

Family businesses are personal and feelings can become very heated because relatives who work in or have a relationship with the company feel a sense of ownership. Clear communication, good planning, and solid documentation is key to successfully passing a business to the next generation with minimal interpersonal dynamics and legal action. If you choose this option:

• Be very clear and transparent with your family members on how you want the succession to succeed. Keep the lines of communication open.
• Try not to let it become personal. This is difficult but keep in mind that a successful business benefits everyone in the long-term. This is where dispute management becomes key. It might be in your family’s best interest to hire a third-party to manage this so negative feelings don’t affect your family life.
• Understand compensation for family members who are involved in but may not inherit the business. How will spouses be treated? Will they own part of the business or can they work for it? Will they be entitled to claim a share in the business in a separation or divorce?
• What happens if you become incapacitated before you hand over the reins?
• Instituting training programs for the family members who will inherit. This includes daily participation in the business, meeting the key members of the company, and helping with decision-making.
• How much income you want to get from the transfer.

A Management or Employee Buyout

Employee Stock Ownership Plans (ESOPs) are a very common way for small- to medium-sized businesses to manage succession. The sale of the owner’s corporate stock is put in an ESOP trust. The stock is allocated to employees who participate in the plan. This way, the owner gets paid the value to the company and the employees have a say in how the company is managed. It’s also a great way to keep a company in the town or city.

Winding Down the Business

Sometimes the only option is to wind down the business. This understandably can be a complicated process especially if you have employees, employee plans, stakeholders, or if your business is incorporated and if you have any creditors. Plus there are taxes that need to be paid. The goal is to do this as smoothly and efficiently as possible so you, as the business owner, can liquidate the business and assets and leave with an agreed-upon sum of money.

How to Plan a Successful Succession

No matter what option you choose, here’s what you need to keep in mind when you choose a plan:

• Are you ready to move your company and yourself to the next stage?
• A list of your goals for the company, your finances, and your personal life including when you want to exit: (at a specific age, in a certain number of years, or when the company reaches a certain value.)
• What role if any you will have in the company after the succession. Will you walk away entirely, remain there as part of the transition process, continue working there as an employee or become a consultant?
• The options for the business with the advantages and disadvantages of each.
• The business valuation. This will give you an idea of how much the company is worth if you decide to sell it. The valuation is based on potential earnings, current market value, assets, debt, and goodwill/reputation.
• Legal implications when you transfer or sell the company.
• A list of potential successors including their strengths and weaknesses that may affect the success of the business.
• Tax implications of each type of succession planning. Business owners often rely on the company for the majority of or all of their income. The plan should ensure that income is supported and taxes are minimized.
• Documentation for the company. This includes company policies, manuals, etc. If you are the only one with this information, this is the time to document them.
• Your key employees, board members and managers, and their roles and responsibilities.

Doing What’s Right For Your Legacy

When you’ve spent decades building your business, you want to make sure that it’s in good hands. Taking the time do decide what’s best for you and the business is the best way to ensure that you leave a solid and successful legacy.