By Erin O'Donnell.
More than six out of 10 small business owners have no succession plan in place. That means they don't know what's going to happen to their company when they are no longer running it, according to a recent survey of 500 small business owners by Securian Financial Services.
Succession planning for your business is just as important as having a will for your family. Without it, your company's future, assets, and legacy are at risk.
What happens when the founder retires, or is disabled or dies? Planning today for these situations will ensure that your partners, employees, clients, and other stakeholders are not left at loose ends.
We spoke with Larry Grypp, president of the University of Cincinnati’s Goering Center for Family and Private Business, about the importance of a succession plan and what it should include. Read below for his recommendations:
Grypp says founders should be planning for their exit from the beginning. "Most people have done some thinking about it, but very few have a really organized, comprehensive plan," Grypp says.
Ideally, business owners should have the plan in place two to 10 years before they want to exit, to achieve a good transition, Grypp says. According to the Securian study, 33 percent of owners planned to sell to a third party, 25 percent expect to close up shop, 20 percent plan to transfer to a family member, and 20 percent plan to sell to a partner or key employee.
Choosing a successor
Succession plans should address both company ownership and leadership: who will make decisions and carry on the firm's vision and strategy. Many, but not all, family businesses are still taken over by the founder's children, other next-generation relatives, or a trusted employee.
Grypp recommends that businesses find an objective facilitator. Someone without an emotional stake will be able to guide conversations such as how the purchase will be financed, what the terms of the buyout will be, and how to transition from one leader to another. This could be an attorney, a business specialist, or someone else in your industry that has made a successful transition.
The facilitator can also help determine whether the chosen successor is ready and capable of taking the reins. "If the founder's retirement is dependent on that business doing well after they leave, they want to make sure that the next generation has the ability to run the company competently," Grypp says.
Selling the business
If there is no successor inside the family or company, a small business can position itself to sell to a strategic buyer. Look for a competitor who would find value in acquiring your company. Another option is finding an investor. But be wary of pursuing investment if your company is very small, or highly dependent on you as the face of the business or the main point of contact for customers. An investor probably won't want the difficult task of finding a new leader who can fill your shoes.
Alternatively, you can set up an ESOP (employee stock ownership plan), which gives your workers shares in the company trust. According to the National Center for Employee Ownership, ESOPs are often used to buy the departing owner's shares. According to the site, "The company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares."
Value your company correctly
It's critical to determine the true worth of your company, Grypp says. Bring in a valuation expert and work closely with your accountant to get an accurate financial picture to ensure a fair sale or buyout price.
Communicate the plan
Who should be the first to know? Will you hold meetings or issue a press release? Decide how and when you will tell family members, partners, employees, vendors, clients—and possibly legislators and regulators—about the plans for transitioning your company's ownership and leadership.
A succession plan should be a living document that is periodically reviewed to make sure it fits the company's current needs. Just like a personal will, a business succession plan should clearly define the owner's intentions for the future and leave nothing to chance.
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