As a successful entrepreneur and business owner/partner, you’ve dedicated your life to building, growing and sustaining a profitable company — but have you stopped to think about how it will go on without you? Whether it’s retirement, a successful exit, or an unforeseen life event, you’re not going to be in a position to lead and own your organization forever. If you’ve been procrastinating on pulling together a business succession plan, it’s important to act now so that your company will be in a position to continue to thrive without you at the helm.
Creating a business succession plan involves executing a list of crucial logistical and financial choices — the first of which is the transfer of your ownership or stake in the business. Figuring out who will assume your ownership of your company is arguably the most important piece of a business succession plan. Depending on your specific situation, there may be multiple options (co-owner, family, employee(s), or third-parties – like competitors or private equity investors, etc.), and the best path forward will ultimately depend on your individual circumstances. Below, we’ll discuss the importance of a business succession plan and common strategies for transferring ownership.
Keys To A Good Business Succession Plan
To create a business succession plan, you’ll need to construct a document that specifically states the instructions for transferring ownership to another party. If you’re selling the business, then the terms of your transaction should also be clearly documented. The purpose of a well-defined business succession plan is to alleviate stress, confusion, and conflict associated with transferring ownership of your business assets to another party. It will help you clearly communicate to all the stakeholders in this important transaction and keep you focused/on-track for success. Your business succession plan should include:
- Your Potential Successors: Details on who would assume ownership of your organization as well as who would lead in your absence.
- Triggering Events or Timeline: Documented circumstances or time frames in which steps of a succession plan would be enacted.
- Operating Procedures: All documents, contracts, and files required to successfully operate your business.
- Financial Details: Funding information and other documentation – called “Due Diligence” materials that are related to your succession plan and the present state of your business, including recent business valuations (typically one to three years worth).
Four Common Methods For Transferring Business Ownership
Below are four of the most common methods for transferring your business ownership. By evaluating your individual scenario, you can determine which option is the best fit for your organization.
1) Sell To A Co-Owner
If you started your business with a partner or co-owner, he or she may be the most logical successor. If you haven’t already, it might make sense to execute a mutual buy-sell contract that would provide your co-owner with the opportunity to purchase your shares from your family or estate in the event of your death. Putting a contract in place that allows for a smooth transfer can help ease any stress on your successor and family. Oftentimes, co-owners will sign-up for a life insurance policy and will use those funds to acquire their partner’s shares. If you choose this route, it’s important to make sure the life insurance policy is drafted by a licensed agent and documented as part of the buy-sell agreement.
2) Pass or Sell Your Shares To A Family Member
This option is ideal for those who own a family business or who have family member(s) working as a key employee(s) within the company. Depending on the circumstances, leaving your business to a family member can be tricky. If you have multiple heirs, deciding who gets what can be an obvious complication. You’ll need to carefully detail who will take over, what their role will be, and the future leadership structure of your organization. Buy-sell agreements can also be used to give non-participating heirs an opportunity to sell their shares if they’d like to. Family inheritance can get complicated, so it’s important to iron out the details upfront.
3) Sell To An Internal Employee
If you have a key leader or a high-performing employee capable of running your organization, it might make sense to do an internal ownership transfer. An employee who already has experience working within your organization may help create a seamless transition process, especially if he or she is well-liked and respected internally. Transitioning ownership to an internal employee may provide you with more confidence that your business will continue to follow your vision after your departure.
There are a number of strategies that can be used to transfer ownership without the insider having to expend large amounts of capital at one time; however, this strategy can be difficult if an employee doesn’t have the funds to fully acquire ownership, so financing options need to be jointly considered and chosen.
4) Sell To A Third Party
If a successful exit is part of your business strategy, or if you know that a certain third party would be interested in acquiring the organization upon your departure, selling your business to another company may be the right resolution for your succession plan. In this case, you’ll also need to ensure that your business documents, operating procedures, intellectual property, and files are all organized and accessible to make for a smooth transition to the new owner.
Selling to a third party is significantly easier if you’re still in the picture, but selling it after your death can be complicated. Business-to-business sales are complex and unpredictable, so it is essential to plan ahead. David Lilly, Founder & Principal Consultant says, “In order to craft a successful succession and exit plan, it makes sense to take three to seven years to get the business in proper order to sell.”
Lilly has worked with clients for as long as ten years on this process – increasing sales & revenues, improving profit margins, documenting operations, implementing tax-saving strategies with legal and insurance professionals, securing patents, and other activities that have enhanced the business and improved sale prices. “The entire process is complex, so it’s great to have a quarterback helping you execute all the moves to maximize your sales price and keep the most money possible in your pocket,” says Lilly.
It’s common for business owners to procrastinate on succession planning, because they simply believe they have plenty of time. Life can be unpredictable, so it’s always a good idea to be prepared. You’ve worked hard to create a sustainable business, so start now to be sure your legacy carries on long after you’ve retired.
A qualified business consultant can work with you to craft a business succession plan that helps to ensure that your legacy carries on. At Lilly Consulting Group, we have years of experience helping our clients prepare their businesses for sale. Contact us today to discuss how we can help your business drive growth for years to come.
