Business Succession Planning Basics
Today’s business world continues to thrive on the entrepreneur with the passion and spirit to create and build small businesses. As the entrepreneur focuses on growing the business and achieving success, one must continue to set long-term goals while keeping an eye on the end game.
Questions often asked may include: Is my business going to contribute to the good of community, take care of my family and employees along with providing for a reasonable retirement income? How do I go about enhancing my business value while planning for my succession and exit?
At Padgett Stratemann, we have worked closely with business owners and corporate executives to establish goals and evaluate options that result in adding value to your business and prepare for business succession and exit. Developing a succession plan requires wise planning and prudent analysis. To simplify the process, focusing on the basics to get started will make the decision making process much easier than you anticipated.
Here are a few basic steps to guide you in establishing your succession plan.
Develop Succession Objectives
Business succession objectives must answer three questions: When?, To whom? and How much? To start, when do you want to leave the business? If the answer is right now, then completing the succession plan becomes vital. If you are several years away, then developing strategies to maximize value and reducing taxes is the place to begin.
Something to keep in mind is how involved you want to be as you begin the transition. Identifying a leader that is a family or non-family member is an important leadership decision to make. Begin now to identify the right person who has the best chance to be successful. Otherwise, the “right person” may be a third-party entity. Evaluating the pros and cons for each choice is an important step.
It is important to understand how much your business is worth and what you will need to meet personal lifestyle needs in retirement, along with leaving a family legacy. How much cash do you need out of the business, after taxes? A team of advisors can help you run personal estate projections to determine what you will need from your business in order to meet your financial objectives.
Identify Key Management Talent
Ensuring long-term stability and viability of the business is the responsibility of everyone in an organization, especially the management team. When key contributors leave an organization and no succession plan is in place, the remaining leaders scramble to “fill the shoes” which rarely results in strong hiring decisions.
In order to create an effective succession plan, identify key management positions that are critical to the success of the business. Look from top down at all levels to understand this initiative. Other steps include assessing the talent pool in these key positions, creating development plans for high-potential employees, and cutting ties with low performers. Consideration should be given to include succession planning in the review process and regular one-on-one meetings between managers and owners.
Mentor the Next Generation
Developing a training program to mentor the next generation is critical for an orderly and timely transition. A training program may include one-on-one coaching and steady increase of roles and responsibilities in the organization. The current leader or owner should clearly define roles, responsibilities and expectations for all of the “next generation” leaders.
Empowering one’s successor to make management decisions and learn from their mistakes as the “leader in training” is a viable step to implement. In fact, for many small business owners, this provides an opportunity to begin the transition sooner and move from operating the business to stewardship of the business in a reasonable period of time.
Build and Protect Business Value
Determining the current value today will enable the business owner to develop strategies and goals that will enable the organization to move forward. This may result in defining the time period to exit and provide incentives to the next generation that builds upon the foundation already achieved in a focused and clear manner.
The benefits of building and protecting business value includes providing opportunities for the next generation to make decisions that impacts the future direction and may create a more productive and efficient set of business processes. The bottom line is that buyers want to own well-run and well-operating businesses. An added benefit is developing the right strategies that may minimize the potential tax impact on a sale of the business.
Plan Your Exit in a Proactive Manner
One should plan their exit in a proactive manner. When do you shift responsibilities? What lies ahead in your future? How much time do you need to accumulate the resources necessary to meet your future objectives and next stage of life? The timetable should include when control of the company will be shifted and the necessary time to mentor the successor.
As your successor takes on more management responsibilities, slow down and take some time away from the office. Evaluate how the business operates, focusing on the strategies designed to maximize and protect business value. This approach enables a smooth transition while showing your confidence in the new leader’s ability to manage the business.
Consider developing a business succession plan today. In doing so, you will find that adjustments to the strategic plan may be in order. Your successor should participate in this process and it will help in the transition, timing, value creation, and establishing future goals that the whole organization can embrace.
Set timelines for the ownership change and your roles from ownership to stewardship to exit. To maintain objectivity, consider creating an agreement on how the succession will take place and benchmarks for increased ownership by the successor and next generation.
For more information, please contact Stephen T. Oliver at (210) 828-6281 or firstname.lastname@example.org