Succession Planning for Your Small Business
It’s possible you’ve thought about what will happen to your business when you retire or exit for other reasons. But have you formalized a plan for succession? Here’s when and how to get started.
We get it: As a small business owner, you have many things commanding your attention, and you may be more concerned about this quarter’s numbers than who will control your business years from now.
But just as planning for current revenue goals is important, so is making an intentional plan about what will happen with your business when you’re no longer at the helm.
Why? To begin with, a legally solid succession plan protects the business and protects the interests of all stakeholders—including you and your family. And if building your legacy matters to you, then it’s crucial that you conduct formal succession planning as part of your legacy planning.
To help you get started, we’ve created a list of some of the most common mistakes we see when it comes to succession planning.
Mistake #1: Waiting too long
Our best advice regarding timing of succession planning? Don’t wait.
Just like saving for retirement, you should start the succession planning process earlier than you think you need to. That’s because you can never know for sure how your professional and personal life will pan out.
There are a variety of scenarios under which you might transfer control of your business, and planned retirement with a full and complete exit is just one of them. What if there are circumstances beyond your control that require a sudden departure? Or what if you decide you’d like to stay involved to a certain extent, but largely step out of the day-to-day?
Whatever the ultimate reason or circumstances, realize that your “ideal” timing might be out of your control. Rather than waiting until you decide it’s time to phase out, do it five to 10 years in advance of when you think you might exit. This way, you can have all contingencies in place well in advance.
Mistake #2: Failing to adequately prepare successors
Often owners focus on just these two questions: Who will run the business? How will I transfer ownership and to whom?
You can avoid this mistake by focusing just as much on a third question: What do I need to do right now to develop and prepare those who will be in charge once I’m gone?
First, think through the “who,” identifying all future leaders where possible. Don’t just identify your replacement. Consider the transition of all senior leadership roles and other critical roles, as well.
Next, make a turn-by-turn roadmap for the development of these leaders. Once successors have been identified, prepare them for their future roles. What skills, education, certifications, and so on will your successor need to ensure ongoing success and growth of the business?
Mistake #3: Not doing right by the business
Intertwining family and business priorities can get tricky (at best) and messy (at worst). When you’re making a succession plan, focus on what’s best for the business, and try not to let the plan be influenced by certain familial relationships. Having a third party involved, such as your wealth advisor, can be beneficial here.
Realize that equal happiness of all family members is unlikely. If multiple siblings are involved, not all may be entitled to equal shares of ownership, income, and control.
In addition, recognize that ownership and management are not the same. Family members may be given a stake in ownership without being given control over business matters. Knowing this can help you establish your legacy, without handing the reins over to a family member who may not have the right skillset, experience, or even desire to manage the business.
Mistake #4: Not putting finances in order
You’re likely pretty entrenched in your business’ finances, but there are some specific things you’ll need to know and do regarding the financial and tax implications of business succession. Engage your wealth advisor or other financial planning professional who has experience in succession planning to help you develop the right strategy.
One thing they can assist with is making sure you have the right business structure. If you have a sole proprietorship or partnership, business assets aren’t distinguished from your personal assets. You’ll need to separate the two by forming a corporation.
Taxes is another area that can benefit from the hand of a knowledgeable pro. Professionals who specialize in succession planning can advise you regarding strategies for minimizing taxes when succession takes effect.
Mistake #5: Not planning for change
Realize that your plan isn’t set in stone. As your personal or professional plans change, you can update your business succession plan accordingly. Also realize that you don’t have to give up complete control of your business all at once. Ownership transfer and succession can happen over a period of time.
Update your plan every few years when there is a significant change in the business or in your personal life (such as a marriage or divorce). You should also update it if the tax code changes.
Ready to create your succession plan? At Ironwood Wealth Management, we specialize in helping small business owners navigate all the intricacies of managing personal and business finances. Get in touch today.