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The Benefits Of Succession Planning For Businesses

JPLegal

The Basics Of Succession Planning

If you own your own business, you should create a succession plan to prepare for the day when you decide to leave your business. This plan can help you avoid drama arising from conflicting family interests, market uncertainty and outside parties looking for an easy opportunity. Additionally, it is a chance to evaluate your business and identify opportunities and improvements for current operations as well as plan to add even more value for the future.

Whether you plan to sell your business on the open market or simply pass on the goodwill to a colleague or family, having a succession plan in place will ensure a smooth transition into the next chapter of your life. For this reason it is a good idea to start planning years before you intend to move on. Without a detailed plan, an unexpected event could put the future of your business at stake.

Choosing Your Successor

One of the main things a succession plan will help you with is transferring your business over to your chosen successor but choosing the right person is an important step. Your successor may be an employee, business partner, family member or an market buyer. It is important that you make a decision that is best for yourself and your business.

If the business has multiple partners or co-owners, you may choose to prepare a buy-sell agreement, a legally binding agreement that outlines the course of action if one of the owners has to leave for any reason. Buy-sell agreements will generally determine the circumstances which allow for the share of the business to be sold (such as retirement or death), the price that will be paid for that share of the business and who is able to buy the departing owner’s share.

If you are choosing to keep the business in the family, it is important to consider how this may impact family relationships to avoid or prepare for disputes regarding inheritance, ownership or management.

If you intend to sell your business to an outside party then having your business valued when creating your succession plan will help you get the most out of the transaction, in particular by identifying ways to increase the value in the years leading up to selling.

It is good practice when creating a succession plan to identify multiple possible successors. It isn’t uncommon for the first choice of successor to be unsuitable and leave you unprepared.

Valuing Your Business

You should value your business regularly to ensure that you are up to date on the current market value of your business. Although the value of your business may change significantly between now and when you plan to leave, a good succession plan will build on the knowledge of your current business value and inform your decisions about divisions, consolidations and investments. It can also help identify opportunities that may arise earlier than you intended to move on.

What A Good Succession Plan Should Include

A well thought-out succession plan should include:

  • The current value of your business;
  • Information regarding who your planned successor is;
  • When you plan to leave;
  • The responsibilities of your successor;
  • Financial issues relating to your business (such as whether you plan to sell it or transfer it and remain involved);
  • Plans for future growth;
  • Other relevant legal considerations.

Most importantly, your succession plan needs to be realistic and achievable. A reasonable timeline with measurable milestones will help you keep on track to ensure the changeover of your business is as smooth as possible. Seeking help from your lawyer, accountant and financial planner ensures that you are making good financial decisions and not leaving anything out.

If you have created a solid succession plan then when it is time to leave you should be able to smoothly transfer your business and see it continue to thrive on the foundation that you have built. Succession planning can strengthen a business both while you remain in control and even after the business has been transferred. Starting the planning process early and with expert help gives you the greatest likelihood for financial success.

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