Succession Planning for the Small Business Owner

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As a small business owner, you go through the risk, sacrifice and hard work to build your business from the ground up. And with all of this time and effort put into building and creating, not many successful owners, like yourself, are dreaming of their organizations dissolving or crumbling when they retire, become debilitated or pass away. But whether you’re too caught up in the day-to-day activities at your company, or subconsciously want to avoid the reality that we all have a limited amount of time on earth, 60% of business owners do not have a succession plan in place. Unfortunately, succession planning doesn’t just ‘work itself out’ and the process takes a lot more time and energy than many may guess. 

A succession plan directs how your business will move forward without you at the helm. It details your vision, identifies a successor and discusses the transition process. While this post is dedicated to succession planning for the small business owner, a thorough succession plan also provides succession details for other key employees. To learn more about how to create a succession plan for your entire leadership team read this blog

business succession planning tips to start the process

As a good starting point for most small business owners, consider these four succession planning questions.

  1. Do you have an heir? 

Passing ownership to a key family member is a popular choice, and even a lifelong dream for many small business owners, especially those with children or close family members who have worked at their company since its start. And while this may be a clear choice when there is only one key family member, it can get tricky when multiple family members are employed at your business. Typically, picking a single successor, versus dividing it up among family, is a better option. One drawback to dividing up a business among family members is that emotions can get strong and conflicts may arise. Further, most businesses are easier to manage when there is only one decision-maker in charge, especially in times of transition. This is especially important to remember when considering only 30% of second-generation family businesses survive. 

  1. Do you have a partnership?

If your business is a partnership, passing your share to your partner/s may seem like the easiest transition. But without the right agreements in place, your share of the business generally won’t automatically transfer to your partner/s if you die. In fact, if married, it typically passes to a spouse. Often, a spouse may have little knowledge or interest in running the business. To ease the transition to a partner, in terms of having the available cash to buy out your share, partners may consider the purchase of life and disability buyout insurance on all partners at the business, with the funds going to your surviving family members. 

  1. Is there a key employee at your business?

For small business owners without an heir or partner, passing the business on to a key employee is another option. If you’re concerned about the integrity of your organization being maintained, a key employee is typically more reliable than an outside buyer in this regard. Consider your organizational chart and how well regarded the individuals are by the entire team. When selecting a key employee, it pays to have your succession plan in place well in advance to provide ample time to train and mentor the individual to ensure success. The drawback to having a key employee purchase your business most often comes down to money. Generally, one of the two options is pursued. The key employee may pay a down payment to your surviving family and then issue payments over a set period of time. Another option, which provides for quicker payout to your survivors, is to have the key employee take out a small business acquisition loan.

  1. In the absence of the above, is there an interested outside buyer?

In the absence of an heir or key employee, many small business owners assume they will sell their companies to an outside buyer, like another entrepreneur or even a competitor, with hopes of funding their retirement. If your dream is to sell to the highest-paying buyer, understand it takes years of preparation, from training management and ensuring operations are as turnkey as possible, to showing long-term financial stability. When selling to an outside buyer, generally you’ll have the least amount of future contact with your organization. You won’t know how the new owner will handle the future operations of your business (i.e. what will happen to client relationships, your current employees and your vision).

Whichever succession plan you decide on, planning well in advance will help prepare your organization for the smoothest transition possible for all parties involved. Consider your succession plan to be the peace of mind for the unexpected … not just for when you retire. 

When small businesses outsource HR to a PEO, the business owner gains back 40 percent of their time.

Jeanette Coleman

Written by Jeanette Coleman