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Succession Planning: Preparing Your Business for Retirement Transition

Written by Jeff Diamond, AIF® on .

Business succession planning is about preparing for a smooth transfer of ownership and continued operations after you retire.

Tips to Plan for the Continuity of Your Company After Your Retirement

You’ve invested years into your small business – maybe even a lifetime – and yet the time will come when you may consider retirement, whether from necessity or desire. Crafting a business succession plan now may help you prepare the company for a smooth transition to new management or ownership when the time comes. Succession planning can also help you prepare for unforeseen circumstances, so developing a clear succession strategy may be an important step in keeping the business you’ve built thriving for years to come. Below, we’ll discuss some common key elements of succession planning that you might consider as you think about the future.

Understanding Business Succession Planning

Business succession planning serves as a roadmap for the transfer of ownership of a company. It may include detailed instructions and timelines to lay the groundwork for a smoother transition. Often, the intended objective of a succession plan is a positive continuation for the business, both from an operations perspective and for employees, though this can never be guaranteed due to inherent uncertainties in business.

While your succession planning efforts will be unique to your business, many succession plans include:

  • Detailed Timeline: Establish specific dates and circumstances involved in the transition process.
  • Identification of Successors: Outline potential successors who are well-prepared to assume leadership roles.
  • Operating Procedures: Document essential procedures, handbooks, and training requirements for the incoming leadership.
  • Business Valuation: Determine the value of your business and the methodology behind the valuation.
  • Funding Mechanisms: Address how the succession will be financed to facilitate your goal of a seamless transfer of ownership.

You might additionally tailor your plan to include industry-specific details that are relevant to your business’s unique operations.

SEE ALSO: Saving for Retirement as a Solopreneur: Strategies to Know

Why You May Need a Succession Plan

While often associated with retirement planning, succession planning may be a smart undertaking for all business owners. It is a tool to help prepare for unexpected events and can help establish the continuity of business operations in your absence.

This type of planning may be particularly critical for businesses with intricate operations, a large team of employees, and/or client relationships or contracts that must be maintained.

When to Consider Initiating Succession Planning

We know that operating a small business takes a great deal of time and energy, so something like succession planning can seem like a heavy lift. However, it’s not something to put on the back burner. Even if you’re not close to retirement age, life throws us curveballs at times. Initiating the succession planning process sooner rather than later can leave you better prepared if something unforeseen happens so that your business can continue to run uninterrupted.

Below are some common types of succession planning frameworks you may consider:

Selling to a Co-owner

Transferring ownership to a co-owner may be a logical choice for your successor. Because of their familiarity with the business, it may help ease the difficulty of an unexpected transition. This arrangement is often executed through a buy-sell agreement, and it can offer a sense of security to current employees and others who conduct business with your company.

SEE ALSO: Small Business Financial Health Checklist

However, it’s important to note that selling to a co-owner requires that sufficient cash reserves are available, as your co-owner needs to be prepared to buy out your shares in the business at any time.

Selling to a Key Employee

If you don’t have a co-owner, you may consider a trusted key employee as your successor. It’s important that the individual you choose has a deep understanding of the day-to-day operations, financial aspects, and client relationships of the business. It’s also helpful if they have the respect of coworkers, clients, and businesses that you have built relationships with. A shared vision for the business’s future is also helpful.

Choosing an employee as your successor also requires a buy-sell agreement. This can be arranged to take place at either a predetermined date or if the unforeseen happens and you are not able to continue operating your business. One of the drawbacks of this agreement is cash, as an employee may not have the funds to buy your shares. You may want to consider financing options ahead of time, such as a payment plan that can facilitate the buy-out. Of course, it’s important to note the conditional nature of financing arrangements and their dependence on various factors, including the financial health of the business and the availability of credit.

Selling to an Heir

Keeping the business in the family may seem attractive – and it may be the right move for you – but it can also be complex. Determining who will take over, especially if other family members are involved in the business, can be tricky. However, once decided upon, clear instructions for the transfer of leadership and leadership structure should be put in place. If other potential heirs aren’t active in the business, you can consider a buy-sell agreement.

Selling to an Outside Party

You can always contemplate an outside party if there isn’t a successor in the above three options. Consider a competitor whose work you respect or an entrepreneur who may be interested in getting involved.

Without another option, this can be a sound strategy from a financial and business continuation standpoint. However, it can be hard to transfer the business you’ve worked hard to build to someone relatively unknown.

Selling Your Shares Back to the Business

This last option can be utilized only for businesses with multiple owners. This approach requires that the business buy life insurance policies for each of the owners. Upon an owner’s passing, the business uses the policy to buy the shares of the deceased owner. This provides for equitable distribution among the remaining stakeholders.

Small Business Succession Planning Review

Navigating small business succession planning can be intricate and complex, especially in relation to your personal retirement planning. Seeking professional guidance may alleviate decision-making burdens and help you plan for the financial viability of the business and/or the financial security of your heirs. At Paces Ferry Wealth Advisors, we offer comprehensive support to tailor a succession plan aligned with your objectives. Contact us today to initiate the conversation about your business planning needs. We look forward to assisting you!