Before you can choose a successor, you need to know what your business needs to succeed after your departure.
Entrepreneurs often spend so much time building their business, they give little thought to how they’ll leave it and often get blindsided by the amount of time it takes to create and execute an effective succession plan.
Owners often associate succession planning with simply choosing a successor. The first step, however, lies in an analysis of what has made the business successful. Does that success rely on skills or knowledge you as the owner have that would leave when you leave? That is often the case of sole-practitioners such as lawyers or doctors – unless they have the foresight to bring in a junior practitioner who will eventually take over.
There are other succession questions to consider: existing and future market competition, necessary technology infrastructure, the talent of existing employees, and management style. Answers to these questions can provide the basis for decisions on whether the business can continue without you, how it would continue without you and who would lead it.
Personal financial planning
Personal financial planning will play a role in the succession plan whether you intend to sell the business to an outside party or gradually transfer your interest to a key employee or family member. If you sell and receive a single lump-sum payment, you’ll need to have a plan for what you’ll do with the proceeds – pay off debt, purchase or start another business or invest it. Advice from accounting and investment professionals can help with strategies to minimize your taxes on the sale.
If you plan to transfer the business to a key employee or a family member, your personal financial plan must focus on long-term capital accumulation to provide cash for living expenses to replace the income you received from your company’s profits. Creating that cushion takes time, but it will give you needed funds and allow your successor opportunities to learn and the freedom to make mistakes without threatening your livelihood.
Entrepreneurs, particularly those with family members involved in the business, often dread actually naming a successor because they anticipate it causing rifts among employees and family members. Again, having an analysis of the business and its future needs to continue its success gives you a platform from which to discuss issues with those affected. Open communication plays an important role in smoothing the way for your successor.
Communication will be key as you develop the person or people you’ve chosen to assume leadership. While you may be tempted to pass on everything you know to your successor, be sure to actively listen and allow room for your heir to learn from experience or try new ways of doing things. Stay true to what has made your company successful, but recognize that your successor needs to prove his or her value to employees and customers and may actually have ideas for improving the business.
Planning how you’ll leave your business can be difficult emotionally, financially, and logistically. Involving your key advisors and seeking help from succession planning professionals can help you identify important details while keeping the big picture in focus. Start early, so you’ll have the time you need to create, finance, and execute a successful succession plan.
Written by Securities America for distribution by Hunt Country Wealth Management.