Succession planning is a process all small business leaders should undertake. Similar to estate plans for individuals, succession plans are used to address situations where there is a death, disability, or retirement of key individuals in the company. When a company is owned by just a handful of shareholders, who also act as an integral part of the business, having a succession plan in place is important. Failure to have a succession plan in place could result in unintended consequences such as an unplanned end of a successful business, and leave not only the company, but the owner’s family in an undesirable position. Some key considerations as you plan ahead for the company’s future:
- Employ and Train Your Successors. Companies with successful succession plans employ, recruit, and retain employees who can step in and take the reins when an owner, or a key employee seeks retirement, leaves the company, or suffers from an unexpected disability, or even death. Leaders of companies who have the foresight, and mentor and train individuals in their own roles, have the greater chances of success when an unexpected change in the business occurs.
- Plan For a Buyer. As a company employs and trains its successor, a company is also creating an opportunity for a natural buyer of the company in the future. Not every business is desirable to third party buyers. But a successor within the company who is invested in and knows the ins and outs of the company may be a natural choice. Succession plans can go hand in hand with a buy sell agreement where there is a gradual buy in by a key employee who is not already an owner.
- Key Man Insurance. Just like all other valuable assets, your company’s most valuable key employees should be insured in the event of death or disability. Although the human loss cannot be replaced, the company can be protected for the economic loss it will suffer in the event a key employee is no longer able to serve the company. Insurance protection can be the life line a company needs in the event of a tragic event.
- Address Multi-Generational Family Issues. In many family businesses, there is more than one generation working for the company. This may mean that parents, siblings, children, and cousins are all working with one another all having certain (different) expectations on what happens in the event of the ownership’s retirement, death or disability. It is best to address these issues head on and have agreements in place well before any expected or unexpected change of event. Developing a plan on how to integrate future generations into the ownership structure can also motivate younger generations. Lack of a written plan and mutual understandings among all those involved can result in misunderstandings and disputes among family members, which will make family functions awkward for years to come.
If your company is evaluating its business and planning for its future, please contact us to discuss how we can assist with your business’s succession plan.