Even if you’re not planning on leaving your business just yet, it pays to have a detailed plan in place for when the time comes. What you put into your succession plan will depend on a number of factors, including your family situation, age, financial position and overall health. To help you get ready, we’ve come up with five ways to make sure your succession plan is the best it can be.
- Choose the right successor
You have two options here: keep it in the family or plan for a sale or buy-out. This will largely depend on whether there is a suitable family member who is keen to learn the business and willing to take it over. Bear in mind that only a third of family businesses make a successful transition to the second generation. Make sure you’ve made provision for active and non-active family members and existing staff in either event.
- Create a transition plan
If you’re selling the business to a family member, consider financing options. The outgoing owner (you) can finance the purchase so that you are lending your family member the money to buy the business from you. That gives you greater flexibility in handing over the business at the right time without your successor having to come up with a large lump sum. If you go down this route, make sure that any repayment plan and interest payable is legally documented.
Establish a timeline for implementing the succession plan. One of the great benefits of keeping the business in the family is that the transition can be gradual to avoid disrupting the normal workflow. While that’s desirable, you don’t want a situation where the business is never fully handed over and there is uncertainty as to who controls it.
- Know how much your business is worth
Whether your successor is a family member, a manager or a third party, you’ll need to value your business to establish a fair price. That means gathering financial statements for at least the past five years, as well as details of any physical assets held by the business and non-tangible assets such as goodwill and intellectual property. There are a number of ways to value your business, and you may choose to use one or a combination of these. Perhaps seek the advice of your accountant or financial adviser to help you navigate this.
- Take ongoing relationships into account
How will your departure affect relationships with suppliers and long-standing customers? When you’re considering whether to gradually phase out your involvement or go for an immediate sale, factor in the relationships that make your business thrive and work out how you’ll mange the changes with those stakeholders.
- Make sure you can afford to retire
How much income will you need from the business to live on once you’ve left? Are you better off taking a lump sum or deriving an ongoing income? Some of these questions will be determined by your reason for creating a succession plan.
Most commonly, you will be looking at retiring from business altogether, so you will need to calculate how much money you will need when you stop working. If you want to sell so that you can start another business, your calculations will be different. Either way, the key is to make sure you can afford to sell up and that you can make enough on the sale not to find yourself in financial strife down the track.
With these elements worked into your succession plan, you’ll find it much easier to undertake the process of passing on the business when the time does come.
If you have created your success plan, tell us below about your experience.