Where is the Business Going? Succession Planning Points for Consideration

By Nora Dunn on 1 August 2009 (Updated 26 April 2010) 0 comments
Photo: iStockphoto

When I was a practicing financial planner, I was shocked at the number of small business clients who did nothing but blink their eyes in response to my line of questions about their business succession plan.

These are people who poured years of blood, sweat, and tears into their businesses, making it a corner piece in their lives. With so much invested, they had little to no thought towards how the business would evolve with them.

Here are some points for consideration in developing your own business succession plan.

1. Start with the end in mind.

Having an exit strategy is crucial, and often overlooked. Although it is tough to know what your businesses will look like at the end while you are still drafting up the initial plans, a well-researched business idea is always accompanied by a vision. So what is yours?

  • Do you have children who may wish to take over the business? If so, how long will you wait for them to decide?
     
  • Is the business saleable, or entirely dependent on your presence to operate?
     
  • If the business is saleable, do you plan to sell the business (or your share of it) to retire? If so, what sale price do you estimate you will fetch?
     
  • If the business is not saleable, how will you ramp down your businesses activities as you reach retirement age? Or will you find an assistant or partial replacement so you may transition into retirement and maintain an income of sorts?

2. Plan for your plans to change.

While waiting for your child to grow up, get an education, and take notice of your business, you may observe that your plan of transitioning the business to your kids is not going according to the plan. So while having a road map is crucial, so too is having the ability to change your plans and roll with the punches. Keep your eyes open for opportunities along the way.

3. Prepare for the things you don’t want to prepare for.

Proper preparation usually involves thinking about something you would rather not imagine, much less come to terms with. However without planning for these unforeseen circumstances, you could lose the business (along with your livelihood, retirement, and financial security). Here are some planning points to consider that will help you avoid potential catastrophe:

  • What happens if I become disabled? Statistically speaking, you have a much better chance of becoming disabled during your working years than you do of dying, and the lion’s share of disabilities last over two years. So – what would constitute a disability in your line of work? A massage therapist could call an injured hand a total disability, while the same injury would do little more than slow down those in other occupations. How will you float the business during this time? Do you have business partners? If so, how will they feel about covering your work load if you can’t pull your own weight? And at what point will they have to buy your shares from you in order to keep the business solvent? How will they come up with the funds to buy out your share of the business in the event of a disability? (A properly structured buy-sell shareholders’ agreement funded with specialized disability insurance can be a way of addressing some of these questions).
     
  • What happens if I die? The response I often heard to this question was “what do I care,” although it was not usually an accurate answer. If you have a partner or family, I would argue that you care a lot about what happens after you die. What will happen to the business? Whose responsibility will it become? And is there money available to keep the business going during the transition period? If you are part of a business partnership, how will your partners continue on without you, and liquidate your shares? (You can purchase life insurance for your business as a way of protecting your family’s financial interest in the business, as well as the solvency of the business itself and your fellow partners.)

4. What are the inherent succession characteristics of my business?

If you provide a service that requires your presence to the extent that you are indispensable, then you are probably looking to make as much income as possible while you can, knowing that there is little or no resale value.

If you have a service-based business that has expensive equipment or the ability for anybody (with proper training and expertise) to replace you, you likely have a product to sell at the end of the day in the form of equipment and lease takeovers, client lists, and goodwill.

And if you have a business that can ultimately operate without your presence, then you have a great product to sell, which can in turn fund your retirement, or even your next business venture.

5. Why am I in business to begin with?

Although it is a seemingly innocent question, this may be your ticket to developing your own business succession plan. Here are some reasons you might be in business, many of which would have different succession plans. You may find that your motivations are a combination of the ideas below:

  • Passive Income. As outlined above, a business which does not require your daily presence is a fabulous resource for current income, as well as a product you can sell for a lump sum later on.
     
  • Active Income. Your primary goal is to make money now. You are not so concerned about building a nest egg with your business (or you understand that the nature of your business won’t allow for it).
     
  • Leave a Legacy. Although the current income is nice, your goal is to build an empire. You have a product that can change the world, and you are building the platform for it to go big. Your legacy may not only be financial but practical in nature, as the world will benefit from your business service or product.
     
  • Family Income and Legacy. Your family business is a way for the whole family to be involved and earn a living. Your actively involved children will eventually take over the reins, and likely will provide you with retirement security as they buy you out of the business.

Although these business succession planning points are far from exhaustive, they should be sufficient to get the wheels turning on what to consider in the succession of your business. Because whether you want it to or not, your business will eventually succeed you. The question that remains – and that you can control the outcome of - is how graceful will the process be?

 

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