Many small business owners are so busy with the day to day operation of their business that not much thought is given to planning for the future of their business. However, it is inevitable that key employees will need to be replaced from time to time. It is also inevitable that you, the owner, will leave the business at some point. In either case, having a plan in place will save you money and headaches and will provide a better return on your investment.
For key employees, it is important to identify individuals capable of filling those positions in your business and put a process in place to ensure they are trained and ready to step in when needed. By planning for the time when you leave the business, either to retire or to pursue other interests, you will give yourself the opportunity to do that with the least amount of stress and the best return for your investment in the business over the years.
Business succession planning generally follows one of two paths:
- Keeping the business within the owners’ family
- Selling the business to other owners, key employees or other interested parties
Keeping the Business in the Family
The positives of keeping the business within the family may include:
- Ability to maintain the family name in the business
- Inside knowledge of the family business
- Ability to plan long term for training and developing the family member(s)
The negatives of keeping the business within the family may include:
- In-fighting amongst family members over who controls the business
- Family members not wanting to take on the responsibilities of operating the business
- Family members not having the qualifications or the ability to run the family business
Selling the Business
The positives of selling the business may include:
- Operation of the business as per usual
- Maybe a greater financial return for you
The negatives of selling the business may include:
- Change in the way the business is operated
- Possible change in the reputation you have built for the company
- Bidding competitions or company buyouts
Some business owners have chosen to groom or mentor a key employee to take over the ownership of the company. The current business owner can then invest some of the capital for the new upcoming owner trainee to buy out the current owner but still maintain an equity position in the company for an appropriate time period.
Some Succession Planning Do’s and Don’ts
- Start planning now
- Communicate openly to all your family members about your plans
- Write down what you want to happen
- Address the potential issues such as possible business failure or equal division of the business early on in your plan
- Actively develop the skills, abilities and knowledge of the next generation
- Prepare a legal will early
- Develop a general plan for transfer of assets
- Consult with a lawyer and an accountant to solidify your plan
- Put off discussing succession
- Be afraid to ask questions and listen to the answers
- Hold on to control of all the aspects of the business
- Define your life around the business
- Rely on the advice of one professional advisor
There is no foolproof method of succession planning. Your approach must be customized to meet your specific needs. Start planning early, think of your business as an asset and get professional as well as legal help to assist with the transition process.
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