Succession planning in your business involves making financial and logistical decisions over who will take over the business in case of death, disability, or retirement. Writing a succession plan is one of the challenging things you will do in your company.
Though the decision you make is personal, legal and financial matters should be taken into consideration before opting for any of these.
Selling to your co-owners
If your business is a partnership, the partners will draft an agreement stating that if one of them passes away, the remaining partners have the obligation to purchase their business interests like shares from their next of kin.
A buy-sell agreement like this eases the burden on the family members of the deceased because they may like to hold onto the shares but lack knowledge on how to invest. This type of agreement compensates them fairly while the remaining partners continue with the business.
If you pass away and your shares go to family members, they might try to sell to the highest bidder. Having an appropriate business insurance policy like the Shareholder Protection plan will protect the other shareholders by giving them funds to repossess the shares back.
Passing on to an heir
The idea of passing on the baton of a fully functional business to your loved ones is attractive to those who have their family’s welfare at heart.
Follow these instructions while passing the business to an heir;
Determine who takes the lead
Having one family member is not complicated but if several are working with you, carefully weigh your options while selecting. You want the best for your company. Find a way to compensate the other family members so they don’t feel neglected.
Include a buy-sell agreement
Since most succession plans include a buy-share agreement, include this too in your plan. It will allow the non-active heirs to sell their shares to those who are active participants.
Set a leadership structure
If you don’t set a structure on how things should be run by your successor, there is the possibility of the business failing. Second-generation owners of the business might even sell it out or neglect it.
Selling to a key employee
If your business is not a partnership and you don’t have an heir in your plan, there is always that one employee who is experienced and trusted by you, other employees, and even customers.
It is better to consider an insider first, if they have the potential, before selling to an outsider. Your employee knows the ins and outs of your company and other employees and customers are familiar with them.
The only drawback is that an employee is not usually in a favorable position financially. You can solve this problem by implementing reseller financing. The said employee will pay you or your family over time, first with a down payment, then monthly or several times a year with interest.
Selling to an outsider
If you don’t have any of the other options, look around and identify other business owners. Even your competitor could be a great fit for this, after all, they are your competitor because they run their business successfully.
Selling to an entrepreneur who has other business interests to focus on may be challenging because they don’t want to be too diverted from their current business. This is especially true if you are selling to them a business that requires re-branding. They may not be too willing to bear the cost and effort.
Despite that setback, it has been done before and you can do it too. Outsource the work of finding a successor to a business broker. A broker will handle the process of finding a buyer while you concentrate on maintaining the image of your business for potential buyers.
Selling back to the company
Businesses with multiple owners have this opportunity. It is also known as a stock redemption or entity purchase plan.
When one business partner retires, passes away, or is disabled, the buyout agreement will dictate how the company will buy the shares. As a business owner, always ensure as you write out your succession plan, you include a buyout agreement.
If a shareholder in a private company leaves and there is no buyout agreement in place, it will leave the company in chaos as selling the shares back will involve legal proceedings and damaged relationships that will ultimately affect the business negatively.
Effective succession planning is a safety net to maintain smooth operations when you or other shareholders are gone. Sometimes you may be prepared as in the case of retirement, but it also prepares you to handle worst-case scenarios that suddenly appear.
Whether you choose an heir or an outsider, weigh the pros and cons carefully. The thought of being separated from a business you have become attached to might be intimidating but a succession plan will give you confidence.