By Karen Axelton
Do you own a family business? Do you have a business partner (or more than one partner)? Do you hope to sell your business and retire on the proceeds one day so you can spend your time playing golf? If the answer to any of these questions is “Yes,” then you need to be thinking about a business succession plan.
A succession plan lays out how your business will run if you should leave the company, sell the company, die or be incapacitated. Much like writing a will, creating a succession plan is something many business owners put off because they don’t want to think about it. But much like failing to write a will, failing to draft a succession plan could destroy your business if unforeseen incidents occur.
Begin your successon planning by thinking about who you would like to have in charge if you’re no longer in the business. This might be your business partner/s, your spouse or a child who works in the business (or even one who doesn’t). If the person you’re considering is someone who might not expect to fill this role (like your spouse), talk to him or her about the issue and whether they have any interest in filling your shoes.
Put the right legal documents in place to ease the transition. Talk to your attorney and accountant. Your form of business will affect what documents are needed. For instance, how will your shares of the business transfer to your successor? Will a buy-sell agreement be needed in case existing shareholders don’t want to work with the successor and he or she needs to buy back their shares? Just like a will, you need documentation to ensure your wishes are carried out.
Another important step in succession planning is making sure the transition is properly financed. For example, a key man life insurance policy could provide the funds for your successor to buy out partners’ shares in the event you die. Your accountant can point out financial needs that may arise and how to fund them.
Part of the financial aspect includes planning for your retirement and how you will transfer ownership and assets in the business to your successor. Again, your accountant can guide you through options such as selling the entire business, selling your shares to the successor or partners, or even selling your business to your employees.
Last, but not least, think about what would happen if illness or accident left you unable to work for a while. This could actually be an opportunity to “test drive” your succession plan by having your successor work in the business. If he or she doesn’t currently work for the company, consider having the person do so at least part time to get up to speed, or otherwise familiarizing him or her with the issues of your role.
A good succession plan will ease your worries and your family’s worries about the future of your business. (If you have a family business, it can also smooth over concerns about who will take your place.) Don’t delay in setting one up.
Image by Flickr user chispita_666 (Creative Commons)