Why succession planning is important for your small business

SmartCompany, July 10, 2017

Succession planning for small business owners is, in part, the act of getting ready for when you’ll no longer be at the helm. This can take several forms, but what we’re talking about is the process of handing your business over to the next generation – whether they be family or staff members – in a way that helps ensure the enduring success of your business.

Why is it important?

Failing to properly consider what will happen when you’re no longer around puts all of your hard work in jeopardy. Who will take over when you want to retire or do something different? How will you unlock the value in the goodwill you’ve created over the years? It’s the answers to these questions that succession planning seeks to answer.

When it comes to succession planning it’s important to start early, as early as possible, as the process will take some time to unfold. The planning itself needn’t take forever, but the process might take many years until it’s at a point where you can step away from the business permanently so get a head start!

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There are three main time periods when it comes to succession planning:

1. Identify the successor

You’ll need to figure out who is going to fill your shoes once you’re gone. Ideally this will be an existing team member that has shown they are not only great at the job, but that they are willing to go the extra mile for your business without being asked. You want someone that is:

* hard-working
* honest
* patient
* strategic
* capable

You’ll also want to make sure this is someone you get along with because you’ll be working closely with them (if you don’t already) for quite some time to come. Even once you’ve left it’s likely you’ll be back in a consulting or board capacity so make sure this isn’t someone that you find annoying to spend time with!

If you don’t have anyone like that in your organisation it’s time to start recruiting. Reach out to your network to start the hunt for a suitable leader for your business – this is a really tough role to fill, but one that’s crucial to get right, so it may be worth forking over the cash to use a recruiter.

2. Broker the deal

Once you’ve got your person lined up and you know they are keen to take over the reins at some point, you need to start discussions to see what the future might look like with them at the helm. Don’t rush this! If it’s a new person don’t bring this up until they are well and truly bedded in (at least 12 months), otherwise you risk muddying the waters and you won’t get a proper chance to see how they perform without this added distraction.

There are a few things to think about here, such as:

* is this person buying the business from you?
* are you going to keep some interest in the business?
* have they got the money to buy you out?
* how much do you need to get out of the deal?
* what will you do afterwards?

Clearly this is a real can of worms, but we’ll try and stick with the basics here. Let’s assume it’s a key staff member who has been with the business for 6 years and is a real go-getter and is responsible for plenty of recent initiative and growth. Let’s call this person Kate and assume she wants to buy the business from you for the number you have in mind. This kind of deal is typically referred to as a ‘management buyout’ (and a tad idealistic!).

Kate will need to finance the deal and the purchase of your equity may happen in one big hit or over time. I’d tend to recommend doing it over a few years, but everyone will have a differing opinion on this one. Kate could get the deal financed in a number of ways, but the main three options are usually:

* borrowings (e.g. secured against property)
* vendor finance (i.e. the business lends the money to the buyer)
* business equity loan (i.e. the business takes out a loan to pay out the departing shareholder)

There are myriad details to consider here, but the above should be sufficient to get you thinking.

3. Earn out period

You’re going to have a period of time where the buyer has an equity stake and you’re still working in the business. This could be due to the buyer taking small chunks of equity over time, or because you’ve agreed to stick around post-sale. Regardless of the reason, there will be a period where you’re working in the business alongside the new owner and this period can be a little tricky.

This period will be a balancing act wavering between offering support and guidance on the one hand, and getting in the way on the other hand. Prepare for this period by discussing it with the buyer pre-sale, as well as preparing yourself mentally, and you’ll be fine.

The above definitely isn’t intended to be an in-depth guide as this topic is both broad and deep, rather this post is intended to get you thinking about what’s going to happen to your business once you no longer want (or are able) to run it anymore.

Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.