Too many business owners fail to plan for what will happen when they can no longer run the business due to illness, disability or death. Some people just don’t want to think about it, while others don’t know how to go about succession planning. Others are so busy with the day-to-day operations of their businesses that they continually put off succession planning because it seems less important than other tasks. Or it’s too daunting to face.
Succession planning is probably the most challenging responsibility any business owner can have, particularly a leader who has built a business from the ground up, so it is crucial to get it right. Without an effective succession plan, your business could fall apart when you can no longer lead it and the business’s legacy may not have the bright future it should have. On the other hand, when you prepare the next generation to step in and step up, your business can continue to thrive and grow long after you’ve left the business.
One of the hardest parts of business succession is identifying your successor. If yours is not a family business, you may have more options to choose from like existing managers, advisory board members or even external candidates. If you want to keep the business in the family, you may need to choose between siblings, children, nieces and nephews or some combination of relatives.
As you examine your choices, look for potential successors who have shown a passion for the business and have demonstrated leadership skills, but be honest about who can truly lead the business. Clients will be able to tell if your successor has a lack of enthusiasm for either the business or for the products and services you offer, so it’s important to find a successor who has a passion for both.
If you’re stuck on this part of the process (and we find many of our business owners get stuck here), seek advice as external unbiased advice can help you ensure your succession plan moves to the next stage.
When you choose a successor early on, you have time to train your successor yourself. This greatly enhances the transition from the current leadership to the next generation of leadership and helps the new leader to feel confident, informed and ready.
Depending on the size of your business and your current workload, you might want to consider hiring an advisory or consulting firm to help create a training program for your potential successor. By involving the services of an advisory or consulting firm, you can make sure that all of your bases are covered: legal, tax, financial, human resources, marketing and more.
Another crucial aspect of getting the next generation to step in and step up is providing the right incentive to your future leader. You know how much work it takes to keep the business running; will your successor be willing to put as much effort into the business? How can you incentivise your successors?
Consider meeting with a succession planning expert like us to discuss tax implications of different kinds of ownership structure and compensation. Learn about buy/sell agreements, shareholder agreements, stock redemption agreements and other possibilities. You’ll likely need a business valuation to help you know what your business is worth and what kind of compensation you can expect.
Incentives for family business successors may be slightly non-traditional, depending on the family and the situation. Phantom stock or stock appreciation rights can provide equity without actually issuing stock. It’s also possible to create a vesting schedule that would allow you as the business owner to test the waters with the new successor before officially handing the entire business over.
When you are running a small business, delegation can be unnatural especially when you’re used to running the show. Sometimes it’s habit or pride, but being the person that built the business from the ground up, you know the ins and outs of the business, and everything that comes with it.
It wouldn’t come as a surprise to you that in order to prepare a prospective successor, they really do need to learn to start thinking as leaders, and making decisions as leaders. For your prospective successor, this is very different thought processes to when they were working as your employee, rather than an owner.
To get you started, consider the tasks in your business that are essential & inessential. What can you pass to another staff member? If you tend to think “only I can do that” perhaps you’ve never explained the goals, the “why” and the how. Communication, patience and recognising contribution in this period is crucial. Also, don’t assume it will be smooth sailing, you will need to keep your finger on the pulse and check in with those employees.
Alternatively, outsourcing skills that aren’t your core expertise is becoming increasingly more accessible and beneficial to small businesses. Tasks like finance and marketing can be outsourced easily and can be engaged temporarily or ad hoc.
We regularly see how difficult it can be for our business owners to learn to NOT work. The sooner you make steps towards delegation and allowing your future successors to step in and step up, the more prepared they will be and have a better chance at retaining your legacy so it can continue to succeed. Additionally, an objective third-party can help tame some of the emotions that accompany business succession.
For more information about business succession, or to talk about any other business issue, get in touch with us at Altus Financial. We’re here to help.