According to a recent study by M&T Bank and the Wilmington Trust Company, that’s how many small business owners do not have a succession plan in place.
The reasons vary; some business owners find the prospect too daunting, while others may get too caught up in day to day operations to devote the time needed to create a plan. Some don’t want to think about another person taking over the company they worked so hard to build. But of those who don’t have a plan in place, the study reports that a full 78% of them simply like running their own businesses.
And that’s great news, because the pride and fulfillment you derive from running your company can actually be enhanced by developing a succession plan. In this second installment of our three-part series on small business owners planning for the future, we’ll show you why—and how—to create your succession plan.
Why Your Small Business Needs a Succession Plan
The importance of a succession plan for a small business is difficult to overstate—and the more you love your business, the more you have reason to prepare for it to continue in a way that builds on your vision.
One of the main reasons to put a succession plan in place is that it gives you the chance now to set your business up for financial viability in the long run, even after you have transitioned it to your successor. This means that not only are you setting the stage for your and your family’s financial security, but that you are seeing to the continued employment of your staff, as well as uninterrupted service to the customers with whom you’ve built relationships over the years.
Another benefit of succession planning is that it gives you control over a number of variables, from who succeeds you, whether or not the business stays in the family, and to what extent—if any—you wish to remain involved.
Putting a plan in place doesn’t require you to make the transition now; it simply ensures that when the time comes, there is a plan ready to be implemented—a plan you created without the pressure or potential emotion of a health crisis or other difficult circumstance.
This leaves you free to enjoy however many years or even decades you still have to run your business, knowing that what you built will not fall prey to confusion, conflicting wishes, avoidable taxes, or the other difficulties that can ensue when a business owner has to exit the company before a plan has been fully enacted.
When You Should Create a Succession Plan
The short answer is, now. Succession plans are not written in stone. In fact, once developed they should be revisited regularly to ensure that they still align with your wishes for your legacy and the continuation of your business. You can always change the plan if circumstances change, if you decide on another successor, or if some other need arises that impacts your wishes.
Delaying the creation of a plan, however, places you at risk of being caught unprepared in the event that illness, disability, or some other life event necessitates your exiting the business sooner than you expected.
Keys to Effective Succession Planning
Succession planning is not a quick process, but it is one which, when entered into with patience and the right tools, can provide you with the peace of mind that your business will continue to prosper and benefit those you care about, from family and employees to customers and even your favorite charities.
The following keys are essential to effective succession planning:
- Gather your team: Assemble a team to help you formulate your succession plan. Your team should include trusted advisors like your small business CPA firm and your legal counsel, as well as any family members, business partners, and stakeholders whose input would benefit the process.
- Choose your successor: You have multiple options here. If you want to keep the business within the family, you’ll have to decide whether you wish to sell it to the chosen family member, or to pass it on as an inheritance. You’ll want to work closely with your CPA firm here, as the tax implications of these decisions can be devastating if not mitigated by careful planning. You can also choose to sell your business to an employee, or to another party not yet part of your family or company.
- Understand your company’s value: Be sure to have a business valuation conducted by an objective third party. This is important whether you are selling your business or leaving it to someone as an inheritance, as having an accurate valuation can help you navigate insurance, financing, and other business decisions.
- Make a preparation checklist: Having time before a transition is implemented gives you the opportunity to get ready for it. Make a checklist of items that will get your business in the best possible state for your eventual exit, including tasks such as creating SOPs, employee handbooks, and manuals, and systematizing and optimizing any processes in need of improvement. Doing these things now means that you will reap the benefit of streamlined processes immediately, as well as having them in place for the transition.
- Train your successor: Pay special attention to readying the person who will take over the company eventually. It’s far better to mentor and begin delegating strategically over time than to have to give a crash course in running the business. Training your successor also means that your employees and customers start to get to know the person and have a chance to build trust while you are still there to maintain the relationship.
Succession planning is crucial not only to ensuring the continued viability of your business according to your wishes, but also to creating an even more profitable, enjoyable, and streamlined operation right now. Start by having a conversation with your CPA firm and legal counsel, and take the first step towards a plan that will set you, your family, and your customers up for success now and in the future.
Image Credit: Maryland GovPics (Flickr @ Creative Commons)