No small business owner wants to think about the potential events that could prevent them from running their companies, be it death, illness or otherwise. Despite how much we'd rather not consider these macabre possibilities, or how unpredictable they are, protecting the future of your small business is nothing to shy away from.
A recent study conducted by Baker Tilly found that four out of five U.S. family business owners are not "succession-ready." Failing to have a formal plan or documents in place detailing what will happen to your business once you're unable to oversee it not only puts your operations at risk, it could leave your loved ones with a mess of legal and financial details to untangle later. No matter your age or the maturity of your business, there's no time like the present to start prepping for succession.
Ingredients for a sound succession plan
Ensuring the smooth succession of your business isn't a one-and-done exercise. It entails a handful of strategic decisions, along with ongoing proactive record management. Here are six factors to consider when developing a succession plan for your small business:
- Updated financial documents: Accurate financial records are essential to making sure your succession objectives are fulfilled, whether you plan for the business to be sold or inherited by a family member. Company valuation information and other critical financial documents should be refreshed annually, if not quarterly. Many owners enlist third party experts to conduct valuations and lend credibility to the numbers (a must-have when you're not around to defend them.)
- Consolidated account information: Especially if you're the sole proprietor of your business, you'll need a secure place to store important logins and other account information for others to reference when you're not there. Login credentials for bank accounts, email, payroll programs and any other IT systems should be made available to your immediate successor to keep operations running smoothly in your absence.
- Buy-sell agreements: If you co-own your business with one or multiple partners, buy-sell agreements help protect everyone's best interests. These contracts spell out what will happen to a company when one owner passes or falls ill (to the point where he or she can no longer run it). Buy-sell agreements formalize details such as the company's sale price, the value of your share, and whether or not the remaining partners should buy out your share. Establishing these agreements early in a company's lifespan shields your partners and family from needless conflict and tough choices in the future.
- Appoint a durable power of attorney: Selecting a durable power of attorney ensures that someone will be able to maintain certain business responsibilities if you become incapacitated. Having this legal document in place lets you control who takes over specific company operations--at least in the short-term--rather than forcing a court to appoint someone.
- Choose and train your successor: Beyond a power of attorney, you should also think about whom you'd like to pass your business down to for the long-term. Deciding this sooner rather than later gives you enough time to select the right person (someone who truly wants the responsibility of running a small business), and start training them. Develop a thorough plan to familiarize your successor with different parts of your business, staff and processes so they'll be ready to step in when needed.
- Take out life insurance: For small business owners, the right life insurance policy can provide the capital to fuel succession plans once you can no longer oversee your company. Funds from the policy may be dedicated for taxes, executing a buy-sell agreement, lending liquidity to the business, or even serve as seller financing if you want the business sold to a third party. Financial and estate planners can guide you toward the right type of policy, and specific policy provisions, that suit your succession goals.
It's difficult to think about what could happen to your business months, years or decades down the line when there are countless to-dos that demand your attention today. By prioritizing succession plans now, you can rest (a little) easier knowing that your business will be in the right hands, with the right resources, once you have to step away.