When someone spends many years building a successful business, the last thing they want is to see it fall apart. However, many business owners do not realize the importance of having a business succession plan.
A business succession plan is a documented strategy for the transition of leadership in business. Whether a founder departs due to retirement, disability, or death, having a plan in place provides stability for the company and its remaining stakeholders.
Business succession plans are paramount to the continued operation of a company. Without one, many small companies go out of business within 10 years of their founder’s departure.
Below are some of the essential steps for creating a business succession plan that will smooth out the process of changing leadership.
Choose the right successor
Finding someone who shares your vision of the business is not always easy. A person with the right skills on paper may not have the same ideas about the company’s culture. In a family business, there are also close interpersonal relationships to consider. For leaders planning to stay with the firm until they retire, the process of choosing a successor should begin about 15 years before their retirement.
Decide how ownership will transfer
There are several financial strategies for transferring ownership, including:
- Outright sale of the founder’s interest
- A buy-sell agreement, where a chosen buyer purchases your interest when a triggering event occurs
- Private annuities
- Self-canceling installment notes
- Life insurance policies
Some strategies act as a complete sale in a single transaction, while others set up a retired founder with a payment stream for many years.
Communicate the plan to stakeholders
Even a well-drafted plan can fail if those involved are not aware of the strategy. Once you have a plan in place, ensure all interested parties know the process and their role in it.
When it comes to protecting the future of your small business, being proactive goes a long way. To learn more about how you can ensure a smooth transition into retirement, or create an emergency contingency plan, consult with a Minnesota business attorney.