As a business owner, how much planning goes into taking a week vacation? Leaving your business, even for a short period of time, takes planning. Unfortunately, many business owners plan for their vacations, but not for the future of their business.
Business succession involves creating a plan for who will take over your business in the event of your retirement, death or disability. A successor could be a person inside the company. Maybe a key manager, employee or it could be a family member. The successor may be an outside person or entity. Naming a successor reduces the possibility of a dispute in the future. In addition to selecting who to transfer ownership to, business owners need to train the new owner on how to run the business.
Business succession is more than simply choosing the successor. It is about ensuring that you are ready to exit your business should an opportunity present itself. With that in mind, it is essential for a smooth transition to ensure that financial documents are consolidated. This includes company valuation data, inventory, tax returns and up-to-date financial records. Potential buyers and lenders will want to see how the business has performed historically before proceeding with a deal.
The business should have a buy-sell agreement in place. These agreements address what will occur in the business should the owner pass away, become ill, or retire. This agreement provides a guideline to determine the value of the company, the value of each owners’ share and rules on who can or cannot be a buyer. This agreement also reduces the risk of conflicts between family members or partners who may put their interests ahead of the company’s.
Proper succession planning calls for careful consideration and preparation. While it may be difficult to entertain the thought of exiting the business, unexpected circumstances can force an early exit. Whether someone is nearing retirement age or just beginning, business owners should take time now to build a succession plan that protects their business’ longevity and secures their financial future.