After working hard for years on building your business, ensure it is a solid legacy by starting early on preparing its future following your death.
Ownership of a business usually represents years, if not decades, of challenging work and entrepreneurial savvy. Still, even the most astute business owners can often be surprised by the complexities and meticulous preparation needed to craft a successful succession strategy.
For your business to succeed you successfully, you need to ensure it can be transferred without endangering cash flows and profits.
Whether you are considering transferring your business to family, liquidating assets, selling to outside interests or to management, you have complex issues to address before making decisions. Ideally, give yourself three to five years to develop your succession plan.
Here are 12 essential steps to help you prepare. This simple checklist can show if your succession plan is “ready”.
Step 1. What do you really want?
What do you really want for yourself, your family, your employees and the business itself? Do you have written instructions? These need to cover:
Step 2. Be in control of your destiny.
All these factors impact on whether it is an appropriate time to exit your business… be proactive and capitalise on them rather than react to them:
Step 3. Plan for a rainy day.
What would you do if…
Step 4. Consider a continuity bonus.
To retain key employees after you die, consider offering them ownership – perhaps via a buy/sell agreement, or extra compensation if they continue to run the company. The compensation can be based on profitability and continued success. As an extra incentive, you could offer a substantial “continuity bonus” funded by insurance payable upon your death. It is important to communicate the plan to key employees so they understand it and know the funding exists.
Step 5. Assemble an advisory team.
Engage a certified exit-planning adviser as your mentor. Your advisory team should include:
Step 6. Work on your business, not in it.
Your business must be able to run without you. Don’t think of your business as just a job. Be sure you are working to build a business that is saleable and has maximum value. Understand what adds value to a business from the eyes of buyer, then focus on building those value drivers.
Step 7. Preserve wealth, and don’t give it to the tax man.
A little planning can enable you to reduce, defer or, in some cases, eliminate capital gains taxes.
Step 8. Develop an estate plan.
Many business owners do not have a formal estate plan. Of those who do, many are shocked to find their plans do not specifically address the handling or disposition of their businesses. Provide contingencies in case your family or other heirs are not interested in running the business. Hundreds of great businesses are offered in fire sales because of insufficient liquidity to pay taxes. Is this the type of legacy you want to leave for your family and heirs?
Step 9. Develop a personal plan.
Have a personal plan that outlines your objectives for various stages in your life, and put it in writing to help clarify your thinking.
Step 10. Have the business valued.
Before you can make any decisions about your business, you need a basic idea of what it is currently worth. Obtain a baseline business valuation/assessment.
Step 11. Hire an auditor.
Audited statements add a degree of professionalism and credibility to your financial reporting that is attractive to buyers. When the time comes, a buyer will want to see three or four years of audited financials, depending on the size of your business. Consider starting the process sooner rather than later.
Step 12. Set up an exit file.
Keep a file containing your personal plan, your business succession instructions, information about professionals you want on your exit team, articles of interest and, finally, contact information on anyone who has approached you about buying your business over the years or anyone else you think might be a potential buyer.
Kerry Boulton, founder, The Exit Strategy Group; author, Million Dollar Pay Day: How to Get Rich and Get Out…Creating the Perfect Exit Strategy and Life After Business