Why Is a Succession Plan So Important?

Business leaders and owners typically are good at building their companies and realizing success in their positions and respective industry (ies), just as was envisioned at the startup stage. But because of their singular devotion to growing the business, they often lack the skills necessary to plan for its succession. That stands to reason. It’s hard to think about selling or succeeding a business that represents your skills, talents, vision, and hard work.

Yet succession planning is one of the most important things you can do to ensure that your business survives and thrives in the future. It enables you to extend your vision for the company beyond your direct involvement and keeps family members or current employees with key roles, who may one day own it, excited and engaged in its success.

First Steps to Begin Building a Business Succession Plan

So, what are the first steps in succession planning? You probably are already engaged in the first step of the succession planning process: building a successful business to ensure a smooth transition in the case someone else will want to own one day and be a key leader.

Businesses go through different phases of development. Analyzing our privately-held family businesses over the years, we have concluded there are four phases of an entrepreneur’s business life cycle:

  • Start-up
  • Growth
  • Maturity
  • Succession

As an entrepreneur, your life’s work culminates in the succession phase, which has various options associated with it, depending on your goals. Generally, the options are external sale and internal sale. A third option is no sale at all, but to succeed it to the next generation, it’s important to utilize estate planning techniques.

External Sale Options

These include going public with an initial public offering (IPO), sale to a strategic buyer, sale to a private equity firm, or sale to an individual investor or group of investors:

  • A strategic buyer may be a customer who wants to secure their supply chain by buying your business, or a competitor that wants to expand its market share.
  • A private equity firm is a buyer that may invest in upgrading your equipment and IT systems, then sell the company at a profit. Not all private equity firms operate this way; though, some make the initial investments and hold on to an acquisition for several years to build its market share and overall value, thereby increasing its return on investment.
  • Individual investors and investor groups come in all shapes and sizes, and with different goals. You may be approached by an investor whose goals for your company dovetail with your vision and business strategy.

Internal Sale Options

These include selling your shares to a partner (if you have one), your management team, or to employees via an Employee Stock Ownership Plan (ESOP):

  • Buy/sell agreements among partners should spell out the conditions and terms of sales among partners. If you have a partner or partners and you don’t have a buy/sell agreement, now would be a good time to put one together with the help of your trusted advisors.
  • Do you have a longtime key employee or management group who helped you build your business? Talking with them now about the prospect of buying the business down the road can help secure a solid succession plan by keeping them engaged and working hard to add to your company’s success.
  • Likewise with your employees – ESOPs provide a way for employee groups to realize the benefits of their years of work by becoming owners.

Family Business Succession

This involves a process of identifying family members who are familiar with your company’s operations (and who, preferably, work there) and want to own the business when you retire:

  • Do you want to sell the business to a family member or do a combination of gifting and sale? The possibilities are many, and planning – including estate planning – should start at least five years in advance of the transaction. Talk to your advisors now.

Ensure Effective Succession Planning with Barnes Wendling

The key thing to remember is your business is an investment and, as with all investments, it should be ready for sale. This does not mean you must sell it. But being ready for sale means your company is a strong, successful, growing business that a prospective new owner would want to own.

For that reason, when we discuss succession planning with our clients, the conversation centers around one thing – maximizing the value for the business owner since it is their largest single asset of their net worth. Whether you plan to retire within five years or 20 years out, a key element of an effective succession plan is building a successful business today.

That being said, there is a strong correlation between how well you plan for succession and the value of the underlying asset. The better you plan for succeeding the business, the higher the value. The planning part is not easy in that it takes time, diligence, and organization.

There is no better time to start than now.

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