Have you started thinking about retirement yet – days playing golf or reading a bestseller by the pool? If you’re anything like 75% of small business owners, you don’t have a plan that is going to get you to the first tee or chapter one, let alone allow you to have comfortable years of retirement. Whether retiring later this year or 15 years from now, you need to build a succession plan.
But why should I, you may ask. There are many reasons. Planning will financially benefit you as a small business owner as well as other family members; it will benefit employees with continued employment; customers with a continued source of supply and suppliers with a healthy and viable client. Most importantly, you’ve spent 40 or so years building a business, a lifestyle and a legacy. You deserve that ‘payday’ that decades of sweat-equity have earned.
What is succession planning?
Succession is people sharing knowledge and following one after the other. A plan is a detailed proposal for achieving something. As a small business owner it may have dawned on you that, like taxes and death, succession is inevitable. You will be more successful in retirement or indeed your next career if you plan for the inevitable in your timeframe, select your successor or outside buyer and engage with a third party for professional guidance.
The reasons that so many business owners don’t plan for their succession is because they think it is too complex and/or takes too much time. Succession planning is not cookie-cutter but it’s also not complicated. And even though plans may change over time, the planning effort to-date is never wasted and always contributes to the result.
In any succession, there is simple planning and then there is emergency planning. No one likes talking about the latter, but it’s very important to the continued success of your business. Emergency planning is required in the event of unforeseen circumstances – a sudden illness or death of the owner of a small business, for example.
Your emergency plan does not need to be extensive or complicated. It can be a one-page plan kept in the centre desk drawer. Identify who is running the company in your absence, what has to happen in the first 24 hours, first week and first month, bank contacts to get pay cheques organised, and sign-on and passwords to mission-critical programmes and email. You should also provide contact information for a key advisor that family members can reach out to for planning next steps in the event of a prolonged absence. Ideally, you’ve discussed with this outside advisor what you’d like to see happen with the business in the event that you can’t return to run it.
Put it on paper
Time will be your friend if you plan for succession well in advance of retirement. Building a plan 10-15 years ahead of exiting the business is ideal. If retirement is closer than ten years, the time is now to get started.
Like Rome, you can’t build the plan in a day. Start today, but schedule time weekly over the next month to add to, edit and revise the plan. And it’s ok too if the plan changes over time, except for the transition date. Decide on the date that you plan to retire and turn over the company to your successor and stick to it. That’s what planning is all about.
Here are my top components of a successful succession plan for you and your business:
Start thinking about what you want to do when you retire
About a year before retirement, take a two-week holiday and test-drive retirement before you actually do it. Retirement can be more difficult than you think, so it’s worth trying it out. Your son or daughter won’t want you back in the business after the official succession date and you can’t go back if you sell the business to an outsider.
Identify your successor
You might identify more than one person until just a few years before the transition. It could be a family member or a key manager in the organisation. Protect your wealth by making sure that your successor is qualified to successfully run the business in the future. He or she doesn’t need to run the business today, but needs to be capable of doing so when you hand it over in the time ahead.
The best way to confirm that your replacement has the leadership skills for success is to professionally assess his/her core skills through an outside organisation. Making sure you have a qualified successor is essential to protecting your wealth.
Train your successor
Develop your successor’s management and leadership skills through outside programmes and over time. Start the brain download process as soon as practical by including him/her in management meetings that you are running or attending. Continuing this transfer of knowledge over time will prepare him/her to run the business.
This is the biggest hurdle for most small businesses. How can a family member or key manager come up with the money to buy the business and let you cash out? If you have ten years to plan, you can develop a compensation plan for your successor to build savings to buy the company. If you don’t have the luxury of time, you may need to provide owner financing to make the transition a reality.
Regardless of your timeframe, reaching out for professional guidance on financing approaches and where money is available to a new business owner should be part of your plan.
Thinking about the tax man is a must with any transition in order to minimise the tax impact to you as the seller, and to provide adequate cash flow for the buyer to run the business. If the plan is succession to a key manager (in the US), it may be a stock purchase and being a C corporation will limit taxes to capital gains.
But if your succession plan is to sell the company on the outside, it likely would be an asset purchase where S corporation or limited liability company (LLC) status would eliminate the ‘double taxation’ of a C corporation. And succession of the business to a family member might be best handled by ‘gifting’ the business and applying the ‘lifetime gift tax exemption’ to eliminate or significantly reduce the payment of taxes. Outside help from your certified public accountant (CPA) and tax planning will keep more money in your pocket.
Review your plan
Annually review your succession plan for adjustments and to make sure that you’re on track for that retirement or transition date.
That’s it! It’s not that complicated and you certainly can make the time now to get started by jotting down a few ideas on paper. Don’t end up like other business owners without a plan who are forced to sell their business for less than what they could have received if they had had a strategy.
Charlie Cleary is the owner of Cleary Consulting, assisting office products dealers with succession planning, buying and selling businesses and strategic planning. With over 30 years of industry experience, he understands the challenges facing independents today and helps them build strategic plans for growth through acquisition or successful exit strategies. Cleary can be reached at firstname.lastname@example.org