If you’ve worked hard to build a successful business, chances are you don’t want it to suddenly end when you decide to retire. So, why is it so hard for so many to put together a plan to keep their businesses operating without them?
Making sure your business outlasts you requires that you do something called succession planning, which many experts call one of the toughest management challenges business owners encounter. Succession planning is not an easy process, and it takes considerable time and thought. But with the right approach, it’s doable and will preserve what you’ve worked hard to build.
Misconceptions may cause some business owners to procrastinate or shy away from succession planning, and a recent article on wealthmanagement.com lays out five of the most common of ones:
- There’s plenty of time. Starting early before it’s an issue is a must, as is working with a financial professional who specializes in succession planning.
- It’s easier just to sell it. Valuation, timing and selling are all part of an equally complicated process that also requires planning and patience. This is not an easy way out.
- A successor will be ready when I’m ready. Selecting and preparing a successor over a long period is an integral part of an overall plan.
- Equal is the same as ‘fair.’ Dividing a business equally among heirs may seem easy and even rational but is often not fair and not the right way to go.
- Giving up ownership means losing control and income. It’s rarely all or nothing, and an effective succession plan can be built to address your changing needs as part of the process.
Experts say that lack of a succession plan or a poor succession transition is one of the most common reasons businesses fail after their founder/owner leaves, retires or dies. So after disposing of succession planning myths, what else should you be thinking about as you go into the plan development process? Some key considerations:
- It doesn’t exist in isolation. Your succession plan needs to be tied into your overall business plan, reflecting your business principles, values and your future business vision.
- It needs to consider alternative outcomes. Different events and eventualities (e.g., death or retirement) need to be explored and included in the plan.
- You can’t do it alone! Different perspectives and disciplines will make development of your plan, as well as its execution, more robust.
- What’s your vision for the future? Where would you like to see the business go? Expand? Diversify? Go international? Be sure to articulate your vision in specifics.
- Understand that your successor could be anyone, anywhere. Which means you should always be looking, observing, talking to others in your network. Don’t look for your clone, and always give objective consideration to internal candidates. And be aware that succession to a family member carries its own set of issues and considerations.
If you’re ready to get started, check out How to Create a Business Succession Plan at investopedia.com. Especially helpful are the discussions of the two basic methods of transferring a business using life insurance as the standard transfer vehicle: cross-purchase agreements and entity-purchase agreements.
Even though you’re now more knowledgeable about some of the ins and outs of succession planning, it’s never too early to engage the services of an experienced advisor—one that specializes and has helped numerous other business owners navigate the tricky waters of succession.
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