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Recent studies show that close to 60% of small business owners do not have a succession plan in place. And, of those businesses that do have a plan, less than 50% have discussed their plan with a lawyer or financial advisor.
Although succession planning is common for large corporations, for small companies it can be overwhelming and is often dealt with only in times of emergency.
While the thought of exiting your business may be difficult to entertain, unexpected circumstances can force proprietors to seek new ownership immediately. Whether you are someone who is nearing retirement or just starting out, small business owners should take time now to build a succession plan that protects their business’ longevity and secures their financial future.
In all honesty, proper succession planning is an absolute must and should begin on day one of ownership, if not before. It’s never too early to take measures to ensure that your company can survive the death, departure or disability of you or one of your key employees. Business succession is a serious subject and should be taken just as seriously.
Succession planning does not mean that you are giving up on the business or that you are ready to hand it over to the next generation. What it does mean is that you are invested in the future of your business and that you want it to continue to thrive or provide income once you have exited your role as the primary leader. Often a comprehensive succession plan can increase wealth, minimize taxes and establish a standard for the future.
A smooth transition of ownership starts with a handful of strategic decisions and the organization of company financials. However, before any planning can be done, it is important to know what you, as a business owner, want for the business’s future. What is your vision?
A business’s succession plan should be a living document. As your personal situation and the business changes and grows, the succession plan should change and grow as well. Changes in business strategy, market conditions and the industry as a whole can significantly impact a succession plan. Regularly reviewing the succession plan ensures that in the event of a disaster, your business is fully prepared to react.
Let’s start by answering a few succession planning questions below in order to determine where you are in the process.
Do you have a Buy/Sell Agreement in place to ensure business continuity in the case of your unexpected death, disability or departure from the company?
Buy-sell agreements are legally binding contracts used to reallocate portions of the business if an owner passes away, falls ill or expresses interest in selling his or her share.
Do you have a current business valuation from a professional appraiser?
Valuations prepared by objective third parties tend to be viewed more favorably by potential buyers, including internal successors, than those calculated by business owners themselves.
Is the Buy/Sell Agreement adequately funded according to the valuation?
Having the proper funding and insurance at the time of succession may be crucial for the continued success of your business.
Have you organized and consolidated inventory documents, tax returns and up-to-date financial records?
Proactively organizing financial documents protects your business in the event you have to sell unexpectedly or a family member must handle the transition under more dire circumstances.
If you have a plan in place, has it been evaluated recently in terms of new tax laws, costs, coverage amounts, etc.?
You must be able to make adjustments to your succession plan if and when tax laws and other regulations change.
Have you Identified potential successors?
Finding the right person, whether a family member or not, takes time.
Do senior employees of the company understand how the transition is going to take place?
As a first step, be an example of transparency and honesty. Open the lines of communication between you and key employees. Talk openly and regularly about what you know, reminding them that they are an important element to the success of your company in the future.
If you answered NO to any of these questions, it may be time to find an advisor. Fahmy & Associates is here to help. Book your NO CHARGE CONSULTATION now by calling 703-760-4630.
— Ken Fahmy
CERTIFIED FINANCIAL PLANNER® CHARTERED LIFE UNDERWRITER CHARTERED FINANCIAL CONSULTANT