Succession Planning: What to Do When It’s Time to Hand the Business Off

Most small business owners are so caught up in the day-to-day running of their business that planning for retirement is hard to even think about. But the succession of your business is complicated and to make it go as smoothly as possible, you should have a plan. It will bring peace of mind to family members, business partners, and employees rather than leaving them guessing about what will happen to the business once you are no longer associated with it.

Successful succession requires creating a plan and re-evaluating that plan periodically. You don’t want your succession to be a sudden decision made in crisis mode. That will result in bad decisions, oversights, and possibly even legal problems. But where to begin?

It takes a team

The first step is to choose your transition team. Even if you are a die-hard do-it-yourself type, outside advice and multiple perspectives are vital. You can’t possibly think of every possible problem that will arise concerning succession, so having a team will help you anticipate as many problems as possible. Having a team also means that, when problems do arise, you don’t have to solve them all yourself.

The transition team consists of valued, long-term employees, the legal professionals you will need (accountants, financiers, lawyers, etc.), any business partners, and possibly family members. The team’s function is to:

• Help you make a vital decision—pass on the business or sell—if you have not already decided
• Help you choose a successor if you have not already decided, or
• Help ready the business for sale
• Formulate the succession plan

Having your team consist of professionals and valued employees helps keep succession planning focused on the succession and not on family or partner issues. Be sure to share all information with your professional advisors. Since they are not family members or employees, they will have a different view of your issues—good and bad. In addition, if you have a team consisting of employees and professional advisors, it can help reduce the chance of having to name an unqualified family member or business partner.

Once the team is in place, it’s time to make the first critical decision: pass on the business or sell?

Pass on the business or sell?

Most families have either a business partner or a member of the next generation who is more qualified and interested than the others. If succession has not been determined by interest, birth order, or partnership, a group effort in choosing and training a successor is a good strategy.

If your valued employees participate in selecting and training a successor, the entire team will benefit over the long run. Inviting employee participation is a good way to retain them and retaining them is vital for continuity. Retaining employees known to your customers, vendors and financiers will also help the succession to go smoothly.

In a partnership, the other partner(s) will buy out the retiring partner. In the case of a family business, however, the challenge is to ensure fair treatment for all family members. Often ownership can be split into passive and active shares, giving the active successor the necessary control over the business while providing an equal economic benefit to the inactive shareholders.

If passing on a family-owned business to a non-family member, it is a good idea to create plans for the successor to buy out the family members. This is also a good idea if a family business will be left in its entirety—ownership and assets— to one family member.

You’ll come out ahead, both financially and personally, if you plan early, make an effort to understand the steps in selling, and take the time to negotiate a price and terms that will support your reasons for leaving the business (retirement, another business venture, etc.). At a minimum, you’ll need to involve your lawyer and accountant to look over the sales contract and consider any tax ramifications. In the case of a partnership, LLC, or corporation, selling a business is even more complex.

Improve your business before the sale

There are a number of things you can do to improve your business before the sale. It’s crucial to give yourself enough time to add as much value as possible.

• Improve your income—Cash is king, clean up your income statement.
• Increase your EBIT (earnings before interest and taxes)—This may be as simple as increasing your advertising, hiring another salesperson, keeping your store open extra hours per week to generate more revenue, and taking a hard look at your expenses to see where you can reduce them
• Improve your assets—Sell off or get rid of any unproductive assets or inventory that is not moving, replace any machinery that’s nearing the end of its useful life, perform necessary repairs and upgrades to improve the property, and have a solid business management system in place
• Clean up potential liabilities—Resolve any pending or potential legal problems, such as product liability claims, employee lawsuits, IRS audits, insurance disputes, etc.
• Address any environmental liability issues—To protect yourself from future claims, you’ll generally have to obtain a satisfactory Phase I environmental audit from an environmental consultant.

The more involved you get with it, the less time you’ll have to spend actually running the business, at the very time when you need your business to run successfully. You’ll be much better off leaving some of the work to lawyers, accountants and transition team members who can take responsibility for many of the tasks involved in the sale.

Keeping communication lines open is the most important factor in a smooth transition. Keep all team members involved in the process. Most important of all, you should communicate clearly to your transition team and successor about your planning during a succession transition and communicate the successor’s vision for the business once they take over.

An integrated business management solution can simplify the succession process by automating daily processes and providing insights into every aspect of a business. Utilizing a single source of data truth, a complete solution adds value to your company and increases your competitive edge, making your business more attractive to buyers.