Successful business owners invest a great deal of time and effort in building their companies. With the day-to-day demands, it is often difficult to imagine stepping down for retirement. Yet, in order to help build financial security for retirement and ensure business continuation, it is important to plan ahead.
Business succession planning can establish retirement income for a retiring business owner, as well as smooth the transfer of operations and/or ownership to family members or another entity. In addition, a succession plan can also provide structure for unforeseen events, such as death or disability.
Laying the Groundwork It is never too early to begin planning for succession. An early start can help you develop an appropriate exit strategy and allow you the time to choose the right person(s) to eventually run your business. It could take many years to groom a successor to manage the intricacies of your company. With this in mind, here are some basic considerations to help lay the foundation for a successful plan:
Valuate Your Business. A key aspect of planning for continuation is calculating the worth of your business. There are a variety of techniques for business valuation. A qualified professional can help you choose the appropriate strategy.
Plan Your Exit Strategy. It is important for retiring business owners to thoroughly plot out their scheduled departures. A sound plan can help ensure smooth operations during the time of transition, as well as facilitate the transfer of ownership.
Meet with Potential Successors. If you wish to keep ownership and control of your business within your family, you will need to assess your family members’ interests and qualifications, and how well they match the needs of the business. Discuss with family members who will participate in the company and in what capacity. Then, determine how working members will be compensated and what nonparticipating members will receive.
If you expect unrelated parties to carry on the business, you will need to meet with the key people involved for in-depth discussions about the company and its future. If succession involves the sale of the business, be prepared to address such issues as what the purchase price will be, how it will be paid, and when the succession plan will be activated.
Develop a Business Plan for the Future. You should outline clear-cut, short-, medium-, and long-term business goals for your successor(s), along with an action plan for achieving them. The business plan should include budgets and financial forecasts that can adapt to changing conditions in both the industry and the economy.
Choose a Transfer Strategy. Depending on the type of business, its value, and your personal financial situation and goals, you’ll need to determine the best transfer strategy for your business. There are a variety of ways to structure and fund buy-sell agreements. For transfers to family members or charity, gifting may be a viable option. Consult your tax and legal professionals for specific guidance.