Developing a succession plan is key to maintaining the future stability of your business. Whether you choose to step aside and allow the business to run smoothly in your absence or decide to sell, a solid plan helps facilitate a smooth transfer of ownership and leadership, while also providing job security for your staff.
Finding Your Successor
Possibly you’ve already decided who will succeed you. A family member, a key employee or another shareholder are common examples of ideal successors as they understand the business and are familiar with the business, customers and suppliers.
If you don’t have anyone lined up, start by drawing up a list of all the possible candidates, whether they’re likely to take over or not. Then, look at each person on the list and consider to what extent he or she has shown:
- Business common sense.
- A passion for the business.
- Business management skills, including financial and human resources management.
- Leadership skills.
- Strong relationships with other employees, customers and suppliers.
If one or more people are internal candidates, give them a particular task that involves skills such as introducing a new product line or marketing to a new customer segment. After evaluating each person’s qualities, you’ll have a clearer idea of who your preferred successor could be, or a shortlist of two or three people.
Using External Sources
If you’re struggling to find a person inside your business then, similar to selling your business, look at using your external networks to find a suitable person. This can include your accountant, bank manager, industry contacts, other small business owners, chambers of commerce etc. Cast your net as wide as you can.
Train Your Successor
Once you’ve identified your successor and they’ve agreed to take over at some stage, it’s important to train them thoroughly to gain the necessary skills, expertise and experience to take over the leadership of the business.
Start by asking your successor to work in each area of your business for a certain period of time, so that they know exactly what’s involved with the:
- Financial management.
- Sales and marketing.
- Customer services and other operations.
Have the potential successor ghost you for a time, matching your tasks and time each day. Much of your expertise will be learned from experience and may not be written down. Now is the time to document all your activities to be able to leave a ‘manual’ of your leadership style and decisions.
Decide on Your Future Position
Think about your role in the business, if any, you will have after you’ve left to provide on-going support for your successor such as:
- The time you can commit each week.
- If it’s an advisory role only or part-time working.
- The period of time you’ll be available.
- The effect your presence is likely to have on your successor and staff.
It’s important to address these points in advance and include them in your succession plan.
Determine When You’ll Step Aside
It’s a wise idea to fix a date when you’ll transfer the day-to-day running of the business to your successor.
Setting a date gives you time to prepare for retirement, your successor time to prepare to take over, and your other staff time to anticipate a change in leadership.
As the date approaches, it’s appropriate to gradually become less involved in the business’s management as your successor gradually takes over the leadership role.
Plan an Exit Strategy
It’s important to plan your exit strategy from the business. taking into account all of the tax, investment, and legal implications of transferring ownership. For example, the transfer of ownership may be subject to tax if your successor buys the business for less than its fair market value.
Seek the advice of your accountant, lawyer and other advisers, such as business valuation experts and investment professionals for any tax or legal implications.
Decide how you’ll transfer ownership of your business:
- If you are a sole proprietor, it should be relatively easy to transfer the business to another person, as effectively you’re selling the assets and possibly charging an amount for goodwill.
- If you’re in a partnership then it’s more difficult, as you are in effect terminating the existing partnership and expecting the buyer of your portion of the partnership to continue.
- A corporation should also be easier by selling your shares in the company to the new owner.
You need to carefully consider these factors and consult with the right professionals. Developing a proper exit strategy can be the difference between a smooth transition of ownership, and an extremely rocky one. By outlining the transition process and next steps, it keeps things running smoothly, allowing ownership to change hands as seamlessly as possible.
Next Steps
- Begin by assessing potential candidates within your business, considering qualities like business acumen, passion, leadership skills, and relationships. If necessary, expand your search to external networks for suitable candidates.
- Once you’ve selected a successor, make sure they gain hands-on experience in all areas of the business, documenting your processes and leadership style to help them transition smoothly.
- Determine whether you’ll remain involved in the business in an advisory or part-time capacity and specify the amount of time you’ll commit to the transition.
- Work with your accountant, lawyer, and other experts to plan the tax, legal, and financial aspects of the ownership transfer, which is key for a well-organized and beneficial handover.
Effective succession planning gives you the reassurance that your business will be in good hands after you’ve retired. However, it’s rarely an easy task. Begin your succession plans as early as you can, and seek as much advice as you need in order to make the transition as smooth as possible.
Contact our expert financial advisors at Woodsboro Bank for all your estate and succession planning needs. Our goal is to ensure your business changes hands as smoothly as possible, and stays profitable throughout the entire process.