5 Steps to Succeeding at Business Succession

by Ryan Kurtz

In a 4×100 relay race in the summer Olympics, just because a team has the four fastest runners does not mean they will win the race.  If they spend their practice time only trying to get faster, they still may not have the winning team.  Most 4×100 relays are won or lost in the transition of the baton.  Similar to an Olympic racer, a business professional could spend their whole life “running” their business only to lose much of the value, if they are not prepared for the transition.

In working with a number of business owners through building and transitioning businesses over the years, we have found a number of things that can help you “Succeed at Business Succession”.

Here are 5 steps to take now to set yourself up for success:

1. Begin Locating a Successor

This may seem very basic but we see many business owners that are unable to complete a transition of the business only because there is no one ready to transition the business to.  Here are a few places you can look for a successor.

• Family members:

If you have a business, family members are often a natural way to transfer your business. A benefit of this type of transfer can be flexibility of the current owner to stay involved in the family business after it is sold.  Selling to a family member can also create a situation where the older generation will sell the business in some sort of installment sale.  This could benefit the buyer with favorable terms (i.e. low interest rate, reasonable payment schedule, etc.) and the seller with some possible tax benefits of receiving the sale proceeds over a period of time rather than all in one year.

 

• Employees

One of the benefits of selling a business to your employee(s) is that it can be an incentive to keep your key employee(s) around.  Stock ownership could be structured in the employee(s) compensation package, which also is a creative way to give bonuses or pay increases.  This could happen in a way where a small portion of the company would be transferred to an employee each year.

 

• Outside business party

Selling to an outside party is always a possibility.  Finding a competitor or someone looking to buy a business can be an option.  This often will bring more changes to the business than the previous two options discussed and sometimes can be difficult for current employees.

 

2. Make your Business Transferrable

Even if you are years away from selling your business, one thing you can do now is to work towards making your business transferrable.  You should work towards having your business function without the owners involved.  For a gauge of this, ask yourself the following questions:

• Do customers need the owners involved to conduct the day to day functions of the business?
• How long can the owners be away before it affects the business?

Having a business operate successfully without the owners involved is a great benefit to the buyer of any business.  Remember, if you sell your business you will no longer be there, you just want to make sure the business still is.

Another key to making your business transferrable is having key employees that would stay with the business during a transition.  Having key employees in place and having low employee turnover should be a goal for any business owner

3. Establish a Personal Financial Plan

Having a personal financial plan in place before transferring the business is important as you make transition plans.  This will help you to know what price as well as the timeframe in which you can sell your business. In addition, knowing if you need $10,000 versus $50,000 a year from the business for personal income is important.  Working on your personal financial plan can give you a lot of clarity in business transition decision making.

 

4. Plan for the Unexpected

Most of us think of business transition as how do I sell my business?

But, what if you would have to transition the business because of an unexpected death or disability?  Having updated agreements in business partnerships is important in addition to having clear predetermined steps if something were to happen to the business owners.  These can include predetermined values of the company or even naming a certain person as someone who would have the first right to buy the business if the owner would to pass away.

Considering life insurance coverage is one possible option that can be an inexpensive way to plan for the unexpected.

It is good to also have all your personal estate documents updated as well as this could go in hand with any business agreements which you have in place.  These could include your Will, Financial Power of Attorney and Healthcare Power of Attorney documents.

It is good to remember: not planning for the unexpected could result in the forced sale of the business or loss of jobs for employees

 

5. Consider a Consultant

Hiring a consultant that specializes in business transitions can be beneficial as you work through a business transition.

We recommend this person being someone who is not involved in the day to day work, has the ability to see your blind spots, and has experience working through relationship conflicts.  The same way it benefits an Olympic relay team to have a coach, it can benefit a business to have one as well.

 

So how can you start planning for your business succession now?

• Begin looking for a successor.
• Take time away from your business – can it still operate without you?
• Prepare now before the possible event of a death or disability.
• Create a personal financial plan.
• Get help! Consider hiring a consultant.