8 Tips for Smooth Business Transition
About three-quarters of small business owners plan to sell their businesses to help fund their retirement, according to a survey from CNBC and the Financial Planning Association. But less than a third have a written succession plan.
About three-quarters of small business owners plan to sell their businesses to help fund their retirement, according to a survey from CNBC and the Financial Planning Association. But less than a third have a written succession plan.
What's the reason for no plan? Of those who don’t, 78% say they enjoy running the company, 44% feel the transition is too far away and 42% say they’re too busy, according to a report from Wilmington Trust.
But successfully offloading your company requires several steps, and you can’t wait until the last year to put them in place. Among other things, you must be working to make your business valuable, understand whom you’re hoping to sell to, and prepare your customers and employees for the transition.
Make a plan
The first part of any succession plan is having a plan and making sure it’s feasible. There are a variety of ways to approach this—from selling to a co-owner or top employee, passing the business on to a family member or selling to an outside party. The key is deciding what direction you have in mind and discussing it with key players to make sure they’re also on board. This should happen now, even if you’re years away from leaving the business, since you never know what life may throw your way.
Understand the value of your firm
Two-thirds of small business owners “have no idea” what their company is worth, according to Wilmington Trust’s numbers. This makes it difficult to determine a sale price and a plan for passing it down. Does it have a sale value? Is it a promising industry? Is your customer base loyal and reliable? Most valuations are some combination of your assets (such as cash, equipment and real estate) and your net profit over time. Unless you have some experience in this arena, consider seeking professional expertise to help you determine what your sale price—or overall worth—would be. This guidance can also help you spot weak points that you can address to add more value.
Think about training
If you’re selling the company to an employee or an heir, you should have a plan for preparing them to take on the role. That will help ensure an easy transition when you step down. That could mean management training, job shadowing or helping them take on responsibilities one by one. If you’re handing off to family, some universities offer family business education centers, and many community colleges have business-related classes that can be useful.
Consider an overlap
In some small businesses, where possible, the current owner steps down but sticks around for a year or more to help with the handoff. That means you’re there to help guide your successor, to help transition clients to the new sheriff in town and to ease employees into a new infrastructure. Don't neglect to factor this into your timing.
Prep your employees
It’s important to communicate with workers about what will happen when the business is transitioned—and why. This is particularly important if there’s any competition as to who will take the helm of the firm, and if there’s any possibility that your crew will jump ship after you’re gone. You’ll need your best people to keep doing their best job in your absence. This also applies to family. If you're passing over one family member to sell the firm to another, make sure everyone understands why you've made your decision.
Prep your clients
Customers may fear that without you at the top, the company’s going to flounder or materially change the way it does things. Put their minds at ease by helping them understand what’s going to happen and how everything will work once you’ve retired. It may be key to work alongside your successor for a while, so they can get to know your customers—and vice versa.
Look into a buy-sell agreement
If you have partners or co-owners in the business, be sure to plan for something unexpected—like your death while you’re still managing the company. A buy-sell agreement is a legal arrangement detailing what will happen if you die unexpectedly, such as your partners buying out your shares of the firm. (Or, for example, if your partner dies and you must buy their half.) Often, buy-sell agreements are backed up by life insurance policies on each partner—purchased by the partners themselves or the company—and the proceeds are used to purchase the deceased’s shares.
Get help if you need it
A business attorney can help you make sure your succession plan is sound, both from a legal and tax perspective. You may also be able to get advice or help from your accountant, banker or a business succession consultant. Consider reaching out through SCORE, an organization that offers free business mentoring and education.
Good succession planning means being organized and looking ahead. But no matter what happens—and especially if something unexpected forces an early retirement—you'll be glad you got your business act together. Get started now.
