When you’ve made your business your life’s work, it can be hard to envision a time where you may no longer be involved in running your company. However, both foreseen and unforeseen events can quickly turn a business upside down. Establishing a solid succession plan can help ease the transition and minimize any impact a change may have on the company.
While more than half of U.S. family-owned businesses have a succession plan, most of these plans are informal. When plans aren’t formalized, one unfortunate event could easily torpedo your vision. It’s important to consider the following to help ensure your plan conforms to your wishes.
Who will be taking over?
The first and arguably most important consideration for succession planning is figuring out who will take the reins. Will you be keeping the business in the family? Does the next generation have the requisite skills to run your business? Do they have any desire to be part of the company? Would your employees be interested in an employee stock ownership plan (ESOP) or is your company prime to be sold to a third party?
You should carefully consider these questions. If your children or other family members intend to cash out, you need to be aware of this when putting together your succession plan. Much different considerations will evolve if you decide to move in the direction of an ESOP or a third party buyer.
Are you going to cash out?
If you are planning to sell your business valuation is of the utmost importance. Revenue, profit, capitalization, and other factors will all need to be taken into consideration.
Planning for the unexpected
Even the most well thought out succession plan can fall apart if the unexpected isn’t considered. Divorce, disability, death, and other unpleasant surprises can throw a wrench into the works. While you may not anticipate every contingency, your plan should provide some guidance for the steps that need to be taken when life throws you a curveball.
Succession planning for a closely held business can involve many moving parts. You should work closely with an experienced legal professional who understands the best method for addressing your business’s needs.