One of the most important business decisions you’ll make is often one of the last decisions business owners consider: Who will take over my company when I leave?
Change is hard in any season. But when it comes to giving up the reins of your small business, it can feel impossible to imagine moving on from your company or letting anyone else take over. It’s daunting to think of parting with the small business you’ve created — especially if you built it from the ground up. And that emotional aspect of succession planning often becomes one of the biggest stumbling blocks to creating an effective plan.
Succession planning is a crucial part of every business’ life cycle
Every business that experiences long-term success must go through a leadership change. That shift of ownership can either set your company up for a new season of growth or destroy the business you so carefully built.
According to 2023 Business Owner Insights survey by Principal, a financial company, a full 39% of business owners don’t have a succession plan in place. Among those that do have a plan, 21% haven’t reviewed the plan in two years or more. These owners aren’t just putting their company at risk by operating without a clear, updated succession plan — they’re missing out on opportunities to prepare the company’s future leader.
Succession planning, when done well, paves the way for a smoother transition, stronger business continuity, and long-term stability. It helps you, as the business owner, protect your retirement income, and empowers your successor to step into their future role fully prepared for what’s to come.
If your company doesn’t have a recent succession plan in place, here are four beneficial steps you can take to start planning for the next phase of your future:
1. Consider your timing
The sooner you start succession planning, the stronger your plan will be. If you’re within 10 years of retirement, you should already have a succession plan in motion. If you’re over 10 years away, it’s a good idea to begin pondering, planning and putting stronger systems into place to ensure a smooth future transition, professionally and financially.
It can take years to prepare a company for a change in ownership. Whether you’re going to pass the business down to a family member or current employee or sell the company to another entity, some restructuring is nearly always required to prepare a business for transition. That’s why giving yourself, and your co-owners, if you have them, multiple years to optimize your business before succession can set your company up for greater success.
2. Evaluate your successor options
For many family-owned small businesses, choosing another family member as your successor seems like the obvious choice. But remember, it takes the right mix of knowledge, passion, experience and vision to lead a company to continued success. A family member may be the natural choice, but that doesn’t always make them the most equipped option.
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Long before you’re ready to step away from your small business, talk to your intended successor (or multiple successors) about their desires, plans and commitment. Evaluate their ability to navigate the transition, and take time to understand what these potential successors need to learn over the next several years, before they step up to the leadership role.
3. Build a financial succession strategy
Selling or passing down a business comes with significant tax considerations. Long before you’re ready to retire, consider how your succession plan will impact your tax bill and retirement savings. A financial planner can help you compare different succession strategies to determine the plan with the lowest tax bill and highest take-home payout.
4. Work with experts
Just as you couldn’t run your successful business without a team of experienced leaders by your side, knowledgeable professionals can help you create a succession plan that benefits you, your business and the leader to follow you.
A robust succession plan often includes several specialized elements, including:
Tax planning.
Selling or passing down your business can cost you or your inheritor tens of thousands of dollars in taxes — if not more. Consult a tax professional while you’re creating your succession plan to avoid unexpected taxes and fees.
Legal compliance.
Changing ownership is a complicated legal process that requires contracts, paperwork and documentation. While developing your succession plan, talk to a legal professional about what paperwork will be required to complete your plan.
Financial planning.
If you’re retiring after stepping away from your business, a financial planner can help you determine how much you should save, invest and spend to maintain a comfortable lifestyle long after you leave your business.
You’re the expert in your field. But succession planning requires the input of several professionals who are experts in theirs. These professionals can guide you through the complex landscape of succession planning, so you can enjoy a seamless transition.
Key takeaway
While these steps work together to help you create a strong, profitable and practical succession plan, it’s just as important to keep revisiting this plan as your business changes. After all, what seems like a good plan today may no longer fit your needs or your company’s growth stage a few years from now.
Even if you’re years away from leaving your business, a thoughtful succession plan can guide the good work you’re doing today — setting your company up for many more seasons of success.
Want more? Escalon has helped thousands of small businesses maximize their potential with efficient back-office solutions for accounting, HR, payroll, insurance, and recruiting and taxes — and we can help yours too. Talk to an expert today.
