Why Succession Planning Makes Sense for Small Businesses
Did you know that one in three Iowa business owners plan to exit their business by 2027? Around 50% of those individuals looking to retire from their business have no business succession plan. The single most neglected aspect of business ownership is having a plan in place so you don’t make the same mistake as others. You must plan for your future — especially if you’re nearing retirement and want to have a solid exit strategy in place.
Here are the answers to a few questions about succession planning.
Why create a business succession plan?
Evolving your business is inevitable. Perhaps you will pass along your business to your family, business partner, key employee, or a combination of the three. You may decide to sell to a third party instead. Whatever you decide, it’s best to be in control of the process and determine whom you want to take over your business. You do not want to run into unexpected issues, like an injury or medical diagnosis, with no successor in place and no plan for the future.
What are some of the financial and emotional considerations?
Transferring your business can be a daunting task, so it’s important to get started early. It doesn’t matter if retirement is on the horizon or a decade away; having a plan in place years before succession takes place can give you better peace of mind about the business you’ve worked hard to build.
Filling out a business succession questionnaire is a great way to get the process started. Here are some sample questions:
- Why did I start the business?
- What would I like to see happen in my personal life or business in the next three to five years?
- Are there significant challenges facing my business?
- What is communication like between the members of my company?
- How well does my current management team work with other employees?
- What do I want to happen in the future?
Transferring your business can come with significant financial considerations. Whether you decide to sell your business or transfer ownership through your will or a trust, ask yourself these questions:
- What is my business worth?
- How do I get the best value out of my business?
- What are the tax implications?
- What is the marketability of my business?
- Are my financial records and processes organized and up to date?
There are also emotional factors to respect when writing your business succession plan. The biggest emotional consideration is finding your new identity after transferring your business. It’s important to have a hobby or passion outside of your business that will help take you into the next phase of your life. How do you answer the following questions:
- Am I ready for a change?
- How do I let go and start the exit process?
- Where do I start?
- How will my family be affected?
- How will my employees be affected?
How do I prepare a business succession plan?
Preparing a business succession plan comes down to planning and communicating. The first step is to consider the timing of your exit. For example, do you want to work for 5 to 10 more years, or are you ready to step away today?
Next, determine who should be a part of the initial planning conversations. Should a family member, business partner, client, or third party be a part of the process? Make sure you have the right people in the room, including your CPA, attorney, financial advisor and potentially a M&A broker, to start these discussions.
Finally, it’s important to determine whom you want to purchase your business. Is there an heir who embodies your values and philosophies? Do you have a key employee who is interested in the business if you do not have a co-owner or family member that you trust with your business? Is there another entrepreneur or third party to take over your business if there is not a clear successor? This decision may come down to how much money you need or would like to get from the sale of your business.
How do I communicate my business succession plan?
Don’t let communication take the backseat when mapping out your business succession plan. A good example of a family business that lacked communication about their succession plan and ultimately went under is Lepird Shoes. The business was successful for many years, ultimately expanding to 40 stores across the Midwest. However, as they expanded, communication became difficult between family members, and they eventually broke down. The business fell victim to communication barriers, such as making assumptions, fostering rivalries, and not having a succession plan in place, leading to the end of the business. It’s critical to talk to those who are affected by your plan and ask for help from others, especially experts and trusted advisors.
Develop a timeline to let stakeholders know about your plan. It may be beneficial to have a meeting where you talk about the business and get everyone on the same page. During this meeting, outline your personal goals, timeline and business vision and values. Then put together a list of action items and ideas along with a business succession planning checklist on what to complete before your next meeting.
Whether you are looking to transition your business to your family or sell to another company or buyer, it’s essential to start early to have an exit strategy. However, you don’t have to build your plan all by yourself. Our Northwest Bank Wealth Management Advisors are available with the tools, resources and business succession planning advice you need to get started. In addition, you can find additional resources through the UNI Family Business Center.
Reach out to one of our Northwest Bank Business Bankers today to learn how to develop your business succession plan.
Advisors represent Northwest Wealth Management, a registered investment advisor and affiliate of Northwest Bank. Not FDIC insured. No bank guarantee. May lose value.
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