How to Develop a Succession Plan for Your Small Business

As a small-business owner, your small business is more than just your job – it's your passion, and a legacy you’ve built over years of hard work and dedication. But what happens when the unexpected occurs, or when you’re ready to retire? Without a solid succession plan, the future of your business could be at risk, and everything you’ve worked so hard to build could be destroyed.

If you haven’t developed a succession plan for your business yet, you’re not alone. Many small-business owners put off succession planning until they’re nearing retirement age. However, the earlier you start, the more prepared you’ll be when the time comes for you to step away. Whether or not that decision is made by you, or for you.

There are different ways to go about succession planning, but we’ll guide you through the basic steps.

Clarify Your Long-Term Goals

Before you can know the proper action to take, you need to have an idea of your final destination. This involves defining your long-term goals. Do you want to pass your business to an heir, or maybe a valued employee? Or would you prefer to just sell it outright to the highest bidder? Maybe you just want to maintain ownership, but have the business be self-sufficient, so you can enjoy your time pursuing other activities. Whatever the case may be, your goals will guide your succession plan, so it’s crucial to have a clear vision.

Identify and Develop a Successor

Choosing the right successor is key to a successful transition. Regardless of who you choose to be your successor, they must share your business values, and have the necessary skills if your business is to succeed. Start early by mentoring potential successors, gradually increasing their responsibilities and including them in important decisions. This will not only help them prepare but will also allow you to gauge their readiness and aptitude.

Pro tip: Use leadership development programs to help accelerate your successor’s readiness.

Create a Succession Timeline

Establishing a timeline can be essential for a smooth transition. Whether you plan to gradually step down, or go for swift exit, setting specific milestones helps to outline and guide the process. A well-structured timeline lets all parties know what to expect and reduces uncertainties and chaos throughout the transition.

Get a Professional Business Valuation

Understand the true value of your business is a crucial part of any succession plan. Professional business valuations can provide an accurate assessment that can be used to set a fair selling price, negotiating with potential buyers, and planning for all tax considerations.

Implement a Buy-Sell Agreement

If your business has multiple owners, a buy-sell agreement can be a critical part of your succession plan. This will outline the terms under which ownership can be transferred, and typically specifies the price. Buy-sell agreements can help prevent disputes to ensure a smooth transfer and can provide crucial liquidity for you or your heirs.

Pro tip: Regularly review your buy-sell agreement to ensure it reflects current and expected future business circumstances and update as needed.

Plan for Taxes and Financial Stability

A key component of succession planning is managing the financial aspects effectively. It’s crucial to understand the tax implications of selling or transferring your business, and to have a strategic plan for the compensation received. It’s also essential to ensure that your successor has access to necessary financial resources to provide support for future success.

Integrate Estate Planning

Estate planning should be a vital part of your succession plan to ensure that personal and business assets are protected, and to minimize potential disputes. Establishing a trust in addition to a will can help manage the distribution of your assets and protect them from creditors and public scrutiny. A trust can also help provide financial support to your loved ones, long after you’re gone. Consult with an estate planning attorney and your financial planner to determine the best approach for your unique situation.

Communicate Your Plans

Clear communication with employees and stakeholders is an essential step to maintain trust and prevent panic when the time comes for you to step away. Once your plans are in place, and the details are buttoned down, you should share the details with your team and introduce your successor. Clearly explain the details and reassure everyone that the business will continue to operate smoothly.

Pro tip: Increase the frequency of communication as the transition nears to ensure everyone is up-to-date.

Review and Update Your Plan

As with most plans, nothing is set in stone. It’s important to periodically review and revise your succession plan as needed. Your business and personal situations are likely to evolve, and your succession needs to evolve with them. This will ensure that your plan is still relevant when the time comes to implement.

Securing Your Future

Developing a well-thought-out succession plan is one of the most important steps you can take to secure the future of your business and your family. By properly planning ahead, you can help safeguard your business and help ensure that it continues to operate in accordance with your values and principles. This can help ensure that your legacy continues long after you’ve stepped away.