Of all the financial topics out there, none is as complex as succession planning.
Deciding what you want to do with your business when it comes time to leave can be financially complicated. It can also be emotionally complicated. It’s this combination of finances and emotions – left and right sides of the brain, if you will – that makes succession planning so difficult.
And yet, it is one of the most important tasks a business owner will ever do. Only 30% of family-owned businesses survive the transition to the next generation. And a slim 10% make it to the third generation. The main reason for this high failure rate is lack of planning. Simply put, many business owners are so caught up in day-to-day management issues they fail to plan ahead.
A full discussion of the ins and outs of succession planning would take more space than I have here. What I can do, however, is pose five critical questions that all business owners need to ask themselves. Think of them as a succession planning primer – your first step toward creating a formal plan for passing your business to the next generation.
What does your ideal retirement look like, and how does your business factor into it? Would you prefer to retire and leave the business? Would you prefer to maintain some role in the business – perhaps as a consultant or part-time employee? Your answers here can make a significant difference to how you structure your exit from your business, and what type of selling arrangement you choose.
If your business represents the bulk of your net worth (as it does for 90% of the business owners I meet), you’ll need to think about how you intend to transfer that wealth from your business to you.
Would that be better served by an outright sale, or by a series of ongoing payments? How important is it for you to provide an income and/or a place to work for family members?
Most business owners I’ve met consider their business as something more than a financial asset – on some level, it’s a vehicle for leaving their mark on the world. If that’s you, you’ll want to consider what happens to the business after you leave. Does it make more sense to pass on the business or sell to someone who will honour that legacy? What business systems and processes can you put into place to secure that legacy before you depart?
Leaving a business to family is a noble goal. But you’ll need to give some thought to how family will be involved in the business after you leave. Do you intend to make a family member a successor? If so, how will other family members view your choice? Is your successor ready to assume control of the business now?
Or will you need to groom or train your choice? Do you intend to divide ownership equally among family members? Or only among those who have an active role in the business?
Succession planning is not a do-it-yourself project.
The assistance of a qualified adviser or business coach can help you consider the above questions, as well as address your current and future economic needs, discuss important financial considerations for your business and your family, look into financing options, secure a potential buyer and help you formalize your plan.
All in all, a good way to ensure the value of your business.