Business succession planning is essential for small business owners, especially since ownership transition can be necessary at a moment’s notice due to unforeseen events such as illness, death or retirement. The Hartford Business Journal reported that up to 85 percent of small and mid-size businesses in Connecticut don’t have a comprehensive succession plan in place. This widespread lack of business succession planning can lead to major obstacles for both small business owners and the Connecticut economy as a whole. There’s an increasing number of business owners expected to retire within the next decade, which will create an extremely competitive market for companies looking to sell to new owners. If local buyers aren’t interested, business owners may have to look to out-of-state investors. A sale made out of desperation can lead to a loss of control over the company’s future, which may ultimately lead to locations closing, moving out of state or laying off employees. Local businesses are a cornerstone of the Connecticut economy, and business owners who want to secure the future of their company need a solid succession plan in place to ensure a smooth transition from ownership to retirement.
There are several options available if you’re an owner looking for small business advice on how to establish a succession plan. Here are a few tips on getting started:
1. Select a designated successor
The first step to business succession planning is deciding who will inherit your business. If you run a non-family owned business, then you have it a little easier. You can select an individual or a group of employees who will be well equipped to run your company and maintain good relationships with your customers. If you select a group of people to succeed you in ownership, then you’ll have to make sure you decide what part of the business will go to whom. If you’re in charge of a family-owned business, you may have a more challenging decision to make. Many of your customers may do business with you because of their relationship with you. Choosing the wrong successor can lead these customers to taking their business elsewhere. If you decide to select a family member as your successor, be it a relative or child, make sure they want to run your family company and have a passion for your business.
2. Create a buy/sell agreement
Once you’ve decided your successor, you need to ensure your business succession plan is legally protected. There are several legal arrangements you can make to plan for succession, and one of the most popular is creating a buy-sell agreement. A buy/sell agreement allows you to make provisions that govern what will happen when you decide to leave your business. You can state who will own your company, how shares will be allocated if there are multiple owners and at what price to sell shares. Even if your retirement is more than 20 years away, creating a buy/sell agreement is a good idea. Buy/sell agreements can determine what will happen if unforeseen circumstances, such as bankruptcy or personal injury, force you to leave your business earlier than expected. This will ensure your chosen successor (or successors) are legally able to transition into ownership when you step down.
3. Prepare your successor (and yourself) for success
Once you have finished your business succession planning, chosen a successor and taken care of the legal arrangements, you’ll need to train your successor to successfully run your business. Even if your successor is passionate about your business, you should set up a training plan that exposes them to every area of your company so they can learn the critical management tasks that you may take for granted. In addition to training your successor, you should also plan your own exit strategy. Give your successor room to learn and grow while you’re still in a place to offer advice, but be prepared to start giving them more control as you approach retirement. This can prove to be difficult for passionate business owners, but it’s essential to gradually let go and allow your successor to take ownership when you’re ready to depart.
4. Communicate your succession plan
The last thing you want to happen as you create your business succession planning is for rumors to spread about your departure. Rumors can become misunderstandings if you aren’t clear about who will be running your business and when the transition will take place. You risk customers taking their business elsewhere if they’re concerned about the stability of your company. Once your plan is in place, make sure to tell your customers and assure them that your successor will provide the same level of service they’ve come to expect working with you. Communication is also essential with the person you’re eyeing to be your successor. Don’t let them jump ship for another job without communicating that you’re considering them as the eventual head of your business.
Business succession planning can take years, so it’s essential to get an early start. Make sure to involve your legal and financial advisors early in process so you can ensure the transition to your successor is as smooth as possible.
Written by Melissa R. MacCaull
Director of Marketing, Union Savings Bank