It might be mentally and emotionally taxing, but succession planning is the first step in preserving your legacy.
Do you have a formal plan to increase the value of your business before it's time to sell? Do you have a formal plan to prepare your successor and ensure the continuity of your business? Or are you one of the 65% of business owners who haven't planned that far ahead?
In its latest study, MassMutual reported that 39% of entrepreneurs expected the leadership of their businesses to change within five years. The vast majority (82%) plan to finance their retirement either through the proceeds of selling their business or collecting dividends from the business after their departure. Consequently, a significant number of business owners are relying on the ongoing success of their business for their future lifestyle.
It is for this reason you need to create a business succession plan to ensure future financial security for you and your family.
A Canadian business survey showed that in both Canada and the United States, only 35% of business owners currently have a transition plan, and most of them are informal. The survey also discovered that among those who do indicate they have a plan, most focus only on the technical issues such as the legal transfer of ownership or tax issues. Most do not address the human side of a business transition that incorporates determining the long-term vision and profitability of the business or the process for selecting and training the successor.
What stops owners from making a succession plan?
At the top of the list of reasons why people don't plan for succession is the belief that there will be plenty of time later to address the transition of the business. Unfortunately, these entrepreneurs don't realize that transition planning requires a much more structured and formal approach than many other types of business planning because of the considerably longer time required to prepare for, and execute, the transfer.
To realize its maximum value, your business must be able to operate without your involvement, and it can take many years to reach that stage. Why settle for less than optimum value when a little planning can result in a much better sale?
Selecting a suitable successor is another major obstacle for many business owners. They may lack confidence in the abilities of a prospective successor, or they may fear choosing between family members and causing conflict. Note that your business can be just as successful under the leadership of someone else if they have time to develop.
Similarly, if you plan to transition the business to a family member or someone within the company, it will take considerable time to groom a successor to take over. So even if your planned exit from the business is 10 or more years away, it is wise to start the process now.
Then there is the unplanned exit from the business. Even though you don't expect any disaster to strike, you would no doubt want to ensure your family and business are protected should tragedy occur. Planning ahead will also allow you to have a say in what the transition will look like and everyone can sleep at night knowing there is some clarity around the future.
Where to begin
As you begin the succession process, there are four fundamental human elements you need to ensure a successful transition of your business. They are: an agile leader, committed team members, a stellar successor and client advocates.
Keeping these four things in mind, you need to identify the underlying potential financial and psychological obstacles in your business that could sabotage the success of your succession plan. Asking yourself some tough questions regarding the vision for your legacy and future monetary needs is critical. Asking yourself these questions may also help you identify and move past your resistance to succession planning. Start with the following types of questions:
• What does your business mean to you and your family?
• Who would you choose to succeed you in the business?
• How would this decision impact other family members and employees?
• What role would you play in the future of the business?
• How would you plan to spend your personal and professional time?
• What are your future financial needs in order to maintain your lifestyle?
Unfortunately, it is often difficult to have this type of honest conversation with yourself and others. However, utilizing a family business adviser who specializes in working with privately owned businesses can guide you and help you to quickly determine the best strategies and tactics that are right for you.
So why take such a chance with your own and your family's future when there are some simple steps you can take to protect your equity and ensure you will have a choice around how and when you will exit? By facing your succession planning challenges and committing to develop a comprehensive transition plan this year, you will be taking the first step to investing in your future right now. And isn't this an investment worth making?