If you own your business, you may already be thinking of putting into place a succession plan. If you have not made provisions for succession, it is an important business strategy worth pursuing today. A succession plan is the strategic transferring of management roles or ownership of the company to others, such as family members, employees, or someone outside the organization. Whether for retirement or more unfortunate circumstances such as deteriorating health or untimely death, succession planning is necessary for the business you have built to continue to operate successfully.
For some business owners, thinking of selling their company or taking a smaller role is a difficult road to travel. For many of us, our business is an extension of who we are and a large part of our identity. As a matter of fact, only 25% of private business owners say they have some type of succession plan in place. Delaying drafting a succession plan can lead to issues in the future. Here are points to consider when looking at your company’s future.
Provide your company with a road map
By developing a succession plan, you are providing a roadmap for the future. If you will be selling your company to a family member, begin mentoring and working closely together with the soon-to-be owner. If the company will be sold to someone within current leadership, take the time to develop teams and cultivate leaders internally; by doing so, employees will see opportunities for advancement thus boosting company morale. Mentoring new leadership provides time to share your knowledge and insights before your departure.
Keep an open mind
When looking for a successor, keep an open mind. Do not overlook someone who might be a good leader because they are second in command. Furthermore, remember that workplace demands, skills, and technology will change over time. Ensure your plan and successor can adapt to change.
Do not wait until it is too late
Putting off the inevitable can lead to problems. If the owner encounters health trouble or an untimely death, a smooth succession may not result. Additionally, account for transition time. Slowly transferring power to a new leader will help the process go more smoothly. Make the succession plan part of the company culture to help ease changes.
If you are selling to a third party, provide yourself three to five years to get all of your affairs in order and allow for negotiations.
Assemble the experts
When business owners start planning their departure from their current role – whether it be for retirement or other unexpected events – they should establish the value of the business or their share of the business. Most entrepreneurs see their business as their “baby,” as they genuinely started it from the dream to the reality it is today. Therefore, owners might see a larger value than is really there. In this case, the valuation comes in lower than their expectation. This can be demoralizing but shows the importance of a professional valuation.
Therefore, you may need to pull in experts from outside the company to help appraise the value, transfer ownership, and ensure the connection between personal objectives and business continuity. An advisory team may include an accountant, legal counsel, your banker, your financial advisor, and possibly a business broker, depending on your situation.
Implementing a succession plan can be a stressful and time-consuming process, but with the correct strategy and experts in place, your company can continue on successfully while you enjoy retirement.
Claudia Mollerup-Madsen is Vice President and a Financial Advisor with the Wealth Management Division of Morgan Stanley in Houston.