The Ultimate Guide to Succession Planning for Entrepreneurs
Entrepreneurs need plenty of self-belief in order to make it in their chosen industry. Unfortunately, entrepreneurs are often guilty of focusing on building their business around themselves and forgetting to consider what happens to the business after they are gone. If you spent a lot of time creating a successful business, you should definitely spent enough time also on planning for its future once you leave, whether due to retirement or something more unthinkable such as illness or death.
This guide will help you understand what succession planning is all about, why it is important and what options are available for entrepreneurs. It’ll also help you focus on the key aspects of creating a good plan.
In this article, you will learn 1) what succession planning is, 2) assessing your options, 3) key consideration in succession planning, and 4) conclusion.
WHAT IS SUCCESSION PLANNING?
Succession planning is all about the things that happen to your business once the owner steps down from running the business. A good succession plan is essentially the roadmap for continuance of the business after the owner is no longer part of the business.
The plan deals with different aspects of changing ownerships, both in the instance of retirement, but also in case of death. It makes sure the business operations can continue as normally as possible, while the ownership of the business changes hand.
Most often succession plans deal either with leaving the business to family members or selling the company to someone else.
Why should entrepreneurs have a succession plan?
When entrepreneurs start planning for their business, the questions of what happens to your business after you stop working are naturally not the first thing on one’s mind. But succession planning is as essential for ensuring business success as it is to have a proper plan for running the business. Life can be unpredictable and planning for different outcomes is essential for business success.
The numbers of businesses that don’t have a succession plan in place is quite high. A recent US Trust Insights on Wealth and Worth Survey found that nearly 66% of business owners don’t have a succession plan. Most often, businesses think a written plan is not needed and the consequences of having a succession plan in place are not properly understood.
But the benefits of having a proper succession plan are enormous. A proper succession plan will:
- Provide financial benefits – the main benefit of a proper succession plan is all about the finances. It helps you avoid unnecessary costs of handing over your business and ensures you take advantage of available tax benefits.
- Make the process smoother – overall, a succession plan will make the actual process a lot smoother and quicker. Changing the ownership can be quite disruptive to your business and you want to limit this as much as possible.
It also helps the emotional burden on your family in case something bad happens to you. A succession plan guarantees they don’t need to worry about the business during the unimaginable difficult time in their lives.
- Ensures you avoid panic decisions – because you have a solid plan in place, you won’t suddenly find yourself in a situation where you need to make decisions quickly. Rash decisions are hardly ever good or cost effective.
- Secures your retirement – a succession plan will secure your retirement, both financially and emotionally! As mentioned above, you don’t need to worry about losing financially from handing over the business. But you’ll also be able to enjoy a smoother transition from a busy business owner to a retired person.
- Help you carry on your vision – succession plan doesn’t only mean financial benefits to your business. You’ve spent a lot of time and money in getting your business to where it is and you shouldn’t see your vision disappear in flames just because you retire or are incapable of running the business. A succession plan helps to carry on your vision forward under new leadership.
Here is a great short video by Entrepreneur on the importance of succession planning:
When to start planning?
Ideally, entrepreneurs should start planning for the handing over process as soon as they set up the business. As mentioned above, succession planning isn’t just about retirement – you need to have a plan in place even for the unthinkable events such as illness, injury or death.
Don’t despair if you’ve been running a business for a long time – you can start even at a later point. If retirement is already looming in the horizon, you should start looking into your options. The most important thing is to ensure you have a plan in place.
ASSESS YOUR OPTIONS
There are a number of options available for entrepreneurs when it comes to exit strategies. It is important to assess all the available options and consider which are the best routes for your business.
Below is assessment of the most common options business owners can make: handing over the business, selling the business, or liquidating the business voluntarily.
Option #1: Handing over the business to a successor
When it comes to handing over the business to a successor, you have two main options: either keeping the business in the family or finding a non-family successor either within the company or outside of it.
Keeping it in the family
Family businesses used to pass on from one generation to another, but succession to the next generations is now much less common. In the US, for instance, the Family Business Institute reported in 2013 that only 30% of family-run businesses succeed into the next generation, and less than 13% are handed over to the third generation. Part of this is down to lack of proper succession planning.
If you are running a business, you need to carefully think whether you’d like a family member to continue your work, as well as whether they are even willing to do so. You don’t want to force anyone to run the business, but you should also not assume your family members wouldn’t be interested.
The key is to ensure the decision is made for the benefit of the business. Your succession planning shouldn’t be influenced by emotions or expectations – do what is best for the business. Even if you are passionate about leaving the business to a family member, you need to guarantee the person has the right skills to run the business.
Keeping the business in the family is naturally beneficial in ensuring your vision remains at the centre of running the business. Creating a family business is a great way to keep your legacy going strong from one generation to the other. It’s often easier than finding an outsider and mentoring opportunities are not just tied to the work hours. On the other hand, the conflict between family and work can become too evident, so be clear it is the best option for your business and for your family.
Handing over to a family member can be financially cost efficient, as long as you prepare for it well. Different countries often have tax benefits for generational shifts in business, so be sure to research your options.
Non-family options for a successor
You could also consider handing over to a non-family member. This is another good way of ensuring your business continues to pursue your passion and you can find a great candidate to help take your business to the next level.
When you are looking for a non-family candidate, you have the option of:
- Transferring the business to someone working in the business
- It’s a great way of rewarding hardworking individuals within the organisation.
- The person is already aware of many of the day-to-day operations of the business.
- The person can start working alongside you, which means you have good mentoring opportunities.
- On the other hand, you might have a limited amount of good candidates to choose from.
- Transferring the business to an outsider
- Have a bigger pool of professionals to choose from and therefore, finding a professionally suitable candidate might not be hard.
- You’ll not be guaranteed the business succeeds or the person continues your vision.
- Mentoring the person won’t be as easy, since they’ll be tied to their current job position.
Finding a non-family suitor can sometimes be a costlier option to family succession. You also need to start the vetting process early to ensure you find the right candidate.
Option #2: Selling the business
You could also choose to sell your business. This will provide you plenty of cash, but it also takes quite a bit of planning and won’t guarantee your business continues on the path you’ve taken it. But if you are looking for a hefty retirement bonus, you might find selling the business the most lucrative opportunity.
If you want to make the most of the sale, then your business finances need to be in order. This maximises the profit you make – the more successful your business, the more you are likely to make from it. Investors are not looking for business potential in many instances, so you’d want to make sure your business is worth the cost.
When it comes to selling, you have a number of routes available. You could opt for:
- Management buy-out (MBO) – in an MBO a management team within the business gets together to buy the business. It has similar advantages to transferring the business to a person within the business. But in-house management teams might struggle finding the financing for a buyout.
- Management buy-in (MBI) – in an MBI an external management teams steps in and takes the stake in its equity.
- Initial Public Offering (IPO) – you could also float the business in the stock exchange, with a new management team stepping in after share purchase.
- Sale to private equity – private equity sales are a form of MBI, in which a financial investor purchases the business.
- Sale to another business – you could also consider merger with another business. If you are a shareholder in your business, this option is often the one that provides the most profit.
Whichever of the above sales options seems the best for your business, you want to consult a business advisor before the final decision. Selling the business is a much more complex process, in terms of sorting out the finances, and you want a professional financial advisor to help you make the most of your sale.
Finally, don’t underestimate the emotional impact of selling your business forward. As mentioned earlier, you won’t be able to influence the future of the business in any way after a sale, so be sure this is the right option for you.
Option #3: Voluntary liquidation
Finally, you can always choose to liquidate your business voluntarily. While stopping your business operations might not sound like something you need to plan for, it is important to create a succession plan even for this instance.
If you are certain you want to liquidate the business before your retirement, having a plan in place beforehand can save you from a lot of hassle, as well as be financially more effective. You also want to make sure your employees are aware of your plans well before you stop business operations. You need to be aware of certain contractual requirements and responsibilities for both your clients and your employees.
Voluntary liquidation is often the final option for business owners and you should make sure you explore the other two options above before going with voluntary liquidation. This final route can also cost a lot more than the other options and it’s therefore wise to look into the other two options first. The cost in voluntary liquidation are higher because you might need to pay extra compensation for employees, and the complete dissolving of the assets and operations costs more than transferring them to another person.
THE KEY CONSIDERATIONS IN SUCCESSION PLANNING
The above gives you an idea of the options available for succession planning. In this part, you’ll find out more about the key considerations. Depending on your chosen route, some of the following points will be more important than others, but it is crucial you keep all of the points in mind when forming a succession plan.
Sorting out finances
Financial considerations are among the most important aspects of creating a succession plan. A succession is never cost-free and you need to be able to have enough money at hand to ensure a smooth transition. Your business finances should also be in order to make the transition straightforward.
You’ll need to get a business valuation done and base your calculations on this. Make sure you regularly revise the financial plan, especially if you aren’t looking to exit from your business any time soon. It is a good idea to get an independent advisor to look into your evaluation to ensure it’s as accurate as possible.
Tax considerations are often the most crucial. It is a good idea to talk with your business accountant or another financial advisor to outline your chosen route and get on top of the tax considerations of your plan.
If you are looking to sell your business, then you need to do a few additional things. If you want to sell the business to an in-house management team, start talking to them early enough to ensure they are able to find the equity to buy the firm. MBOs often aren’t as easy to finance, since you won’t have an outsider investor putting money on the deal and traditional bank loans aren’t easy to come by in today’s economic environment.
You’ll also need to start paying attention to the business’ finances. As mentioned above, potential buyers aren’t looking for potential, they are looking for businesses that can make them money. Therefore, you need to make sure your business is turning a good profit to guarantee the right kind of investors are attracted to your business. It will also ensure you make a good profit from the sale.
The right skills the successor must have
If you are handing over the business to a successor, whether or not it’s a family member, you need to first outline the skills needed for the job. It is important to think what makes a good manager for your business and what type of qualities you want from the new business leader. You also need to look into the future – where do you want to see the business go in a few years? Use this to create a set of skills and qualities you want the successor to have.
A good set of skills and requirements will ensure you limit your choice for the right candidates and it guarantees the business has a better chance of success after you are gone. Keep in mind that you aren’t necessarily looking someone exactly like you – you just need someone with the right qualities to continue moving the business in the right direction.
Remember, if you are looking for someone within the company to replace you, you’ll also need to fill their old role. Therefore, you also need to prepare enough time for finding a suitable replacement and so on. Consider all these elements when creating a shortlist of candidates.
The list of skills will help you identify potential candidates and can help determine whether it is possible to find a successor within the family or the business or if you need to look elsewhere. Talk to potential candidates even before you start mentoring them for the position.
Prepare to share your vision
Unless you choose to sell your business, you’ll want to ensure the vision you have for the business is passed on to the new management. You need to start mentoring your future successor as soon as you’ve chosen one to ensure they are ready to take on the role well before you make an exit.
If you are handing over to someone who is not a family member or indeed part of the business, building trust will be vital. You want to ensure the person knows your vision for the future.
Develop a timeline
One of the best ways to ensure the transition is smooth is by developing a timeline. You’ll want to have an idea in place for a possible stepping down. This helps you leave enough time for vetting the right candidates, selecting the person, mentoring them and finally, transferring the business over to the person.
Furthermore, even a sale won’t happen overnight and you don’t want to find yourself rushing a deal in the last minutes. If you are certain you’ll sell the business, you’ll also have more time to lay the foundations for a successful sale. You don’t want to make rushed decision over the future of the company. Not only is this harmful for you in financial terms, but it can also damage the future prospects of your business.
As mentioned at the start, you would ideally want to start thinking about the timeline as you set up your business. You should leave at least two to five years for planning the succession, but have a plan in place for the unfortunate occasion of something going wrong. You can always change your plans, as you get closer to the retirement age, if your situation has changed.
Thinking about your retirement as you approach your 30s or even 40s might not sound important and it’s not easy to consider the worst might happen to you in life. But as an entrepreneur, you need to be aware of these things and plan for the future.
Hopefully, the above has shown you how important a succession plan is for entrepreneurs. The good thing is that there’s plenty of help available and the different routes of handing over, selling the business or liquidating it mean every entrepreneur will find the right solution. You just need to start planning early.