As a business owner, you’ve put your heart and soul into your business, and the thought of turning over the keys may seem unfathomable. Yet, thinking ahead is essential to facilitating a smooth transition and ensuring your legacy. Enter succession planning.
Succession planning defined
For business owners, succession planning is, most simply, the process of preparing to pass along the business once you retire or are no longer able to work. For larger companies, this is a process that involves identifying and developing key individuals to assume leadership positions.
For small businesses, it’s more than naming a successor, though it will be important to determine who you want to succeed you as owner, whether that’s a family member, an employee, or a third party. It’s also about making appropriate financial decisions as you seek to ensure both the security of the business and your future. You’ve spent your days (and nights) making decisions meant to enable your company to thrive and prosper, but are you asking yourself the most important question:“What will happen to the business once I leave?”
To begin to answer this question, explore the following insights to determine why succession planning is important for your business.
Why do I need a succession plan?
To get started, you must explore why succession planning is so critical to your business. As a business owner, it’s never too early for you to get started. So, whether you’re planning on retiring in three years or thirty, take the first step by exploring the importance of creating a succession plan.
- You need a strategy. A succession plan is just that – a plan that’s intended to prepare your company for a time of transition. An actionable blueprint that is designed with the goal to allow the company to survive and prosper, even under the worst circumstances, is as crucial as ever. Ask yourself what you want to happen – whether you want to keep the business in the family or sell it to a stranger – and get started on executing upon your plan.
- Your company’s future depends on it. Without a succession plan, your company may be left in chaos if you exit unexpectedly. A succession plan is designed with the goal to protect your company as you’re no longer able to fulfill your duties as owner. You want to know the answer to the question, “What would happen if I didn’t show up tomorrow?”
- Your own future depends on it. While succession planning supports your business’ prosperity, it also supports yours, allowing you and your family to work toward the financial goals you’ve set for yourself in retirement. A succession plan can support you – and your family – long after you’ve exited the business.
More than providing you with a blueprint or a strategy, a succession plan helps to give your company the ability to thrive once you’ve moved on. Take the time to speak with your key stakeholders, including your financial advisor, to discuss the importance of a succession plan.
And now that you know why, let’s explore how.
What are my options?
Now that you know the importance of a succession plan, it’s time to find the optimal approach. Get started by exploring the following strategies to ensure you have the right tools in place to plan for the future.
- Insurance policy: With an insurance policy, you as the business owner – along with any partners – take out a policy financed through company funds. These policies derive cash value and can be used to buy one of the partners – or their beneficiary – out. Insurance policies help to create the capital needed to sustain the future of your organization.
- Employee stock option plan (ESOP): In the case of an ESOP, you transfer ownership of the company over time to the ESOP – creating employee owners within your company – and upon exiting you’re paid out for your shares in the company. This option allows you to transfer ownership back to the company, without selling to a third party when you leave.
- Retirement plans: As part of a retirement plan, you as the owner begin taking money out of the company to build up an amount of money that will help you, in retirement, live off of. This may help to free your business to be sold, as you will have a plan in place for your retirement.
Speaking with a financial advisor
will help to provide additional clarity and insight into the most suitable option for your business and circumstances. Take control of your future – get started by reaching out to your business banker or financial advisor.