Business succession planning is similar to drafting a last will and testament, except the plan is for the business rather than an individual. It’s a process that creates an orderly path to transfer ownership in a business should doing so be necessary.
Most businesses should go through the succession planning process. Individuals who make a little extra money from a hobby may not need a backup plan in case something happens to them, but any business that’s more than a gig should have a plan in place to transfer ownership if it’s ever necessary to do so quickly and unexpectedly. Businesses that are larger than a sole proprietorship, especially, should have a succession plan in place because more than one person’s income is dependent upon the business.
It’s never too early to begin succession planning. In fact, the steps to smoothly transfer ownership of a business can (and should be) put in place before a business even opens. This can be included as part of the initial planning phase.
Businesses that don’t have a plan already should begin developing one sooner rather than later. An unexpected illness or death can occur at any time.
There are many different factors to consider when planning the passing on of a business, so succession planning involves several parties. Depending on the people involved in a business and the business’ complexity, it might be necessary to include:
In some cases, even competitors are involved in succession planning. Including competitors may sound counterintuitive or foolish, but they’re sometimes the people most likely to purchase a business -- especially if the business is owned by only one person and, therefore, there aren’t partners who may be interested in acquiring a bigger share of the business. Competitors already know the industry, and some might be interested in an opportunity to grow their own company.
Financial advisors are often the first people business owners and partners talk to about business succession planning. While they usually recommend bringing additional professionals who have expertise in other fields (e.g. CPAs and lawyers) into the conversation, financial advisors are usually able to both help business owners begin to think about the questions associated with succession planning and suggest other professionals who may be able to provide assistance.
All businesses need at least one competent leader who can run and guide the company. Without someone who has the expertise and skill to manage all aspects of the company, businesses large and small will fail -- and that presents real challenges for lots of businesses. Many businesses are not prepared for an owner, partner, or key employee to unexpectedly retire, become ill or pass away. Business succession planning helps businesses prepare for unforeseen, but possible, events like these.