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Business Succession - 7 min read

A solid succession plan guides your business through a transfer in ownership and leadership. But when it’s properly designed and executed, it can do so much more than that.

 

Unfortunately, too many succession plans neglect to address key components such as unplanned events and communicating with stakeholders. These gaps can lead to hurt feelings and missed opportunities.

 

In this article, we look at 10 key issues that are commonly left out of succession plans. As you’ll see, a well-crafted plan not only ensures success in the future, but it helps you to strengthen your company today.

 

1 - Planned and Unplanned Events

Most business owners know when they want to retire. The owner’s retirement is an essential part of succession planning, but life doesn’t always go as planned. Some business owners fail to make provisions for unplanned events such as death or disability. Neglecting to prepare for the unexpected leaves too much up to chance. In many cases, insurance can help to protect the value and provide liquidity in such circumstances.

 

Use your succession plan to spell out solutions for different scenarios. Your arrangements could pull the company through if unexpected events come to pass.

 

2 - Tax Implications Based on Entity Type

The only number that matters in a transaction is the amount you get to keep--after taxes. And that amount can change depending on your entity type and how taxes affect your bottom line. If your succession plan doesn’t address tax implications for your business structure, you could be setting the company up for financial problems in the future.

 

Discuss possible changes in business structure with an expert who can anticipate the tax implications of each type. If it makes sense to change to a new type of entity, you’ll then need to decide on the best time for making the change.

 

3 - Identification of Likely Successors

Too many succession plans fail to identify likely successors. Businesses with multiple owners have an advantage here because they already have potential successors waiting in the wings. For sole proprietors, however, the identification of likely successors can make or break your organisation for the future.

 

Another crucial element is bringing on a junior partner capable of assuming leadership over a portion of the business. This key player can help you convert from a sole owner firm to a company with multiple owners.

 

4 - Business Valuation

Some succession plans neglect to incorporate a comprehensive business valuation, perhaps because assessments can be so tricky. For instance, will you base your formula on revenues or profits? If you go with profits, will you include owner benefits like auto allowances and retirement contributions? We can help you make these decisions and provide a business valuation that can serve as the basis for your negotiations and decision-making.

 

5 - Client Attrition

An essential but often overlooked succession issue is the problem of client attrition. Despite the successor’s best efforts and even in the midst of brilliant success, it’s common for a company to lose a portion of its customers when the owner retires or dies. Plan for client attrition the way you would plan for other anticipated challenges.

 

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6 - Family Concerns

Family businesses face unique issues when it comes to succession planning. To create a succession plan that everyone sees as a win, address these questions:

  • Does the program achieve a fair inheritance for each of the children in the family?
  • Do additional members of the family want to be involved in the business?
  • How will the younger generation prepare to take the reins?
  • How will the asset-holding generation retire?

An outside facilitator can help families to tackle these issues and develop a succession plan that achieves multiple goals.

 

7 - Knowledge Sharing

A successor can receive the legal authority to run the business, but how will the incredible store of knowledge be passed down to the next generation of leaders? Your succession plan could outline a series of meetings for an in-depth discussion of operating styles, histories and expectations of board members and managers.

 

The successor will also need critical information about investors, creditors, clients, analysts and regulators. Don’t just hope that knowledge sharing will take place; make it happen through your succession planning.

 

8 - Communication with Stakeholders

For optimal stability, share your plan internally and externally to promote a positive perspective about the coming changes. Your succession plan should include details about communication with all stakeholders, from senior management and the board of directors down to suppliers and customers.

 

9 - Management versus Ownership

Often, succession plans focus heavily on current and future ownership of a business without paying enough attention to management. The plan must ensure that the company has a person (or a team) who can handle the day-to-day business activities during the transition. Without careful monitoring of operations, finances, administration and personnel, the company will soon have more substantial problems with which to deal.

 

10 - Succession Best Practices

For the best odds of creating a succession plan that will carry your business through a transition, access outside help. With business experts who thoroughly understand succession planning, your plan will safely deliver your company from one owner to the next.

 

Expertly delivered successions can strengthen a company while providing for the original business owner. Whether you’ve started the planning process or don’t know where to begin, we can help you to achieve the peace of mind delivered by a well-rounded succession plan.

 

To set up a consultation with one of our business advisers, reach out to us at Altus.

 

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