Types of Succession Plans
As we mentioned in last week’s post, there are two types of succession plans – the What-If Plan, and the Best-Case Scenario Plan. What’s the difference?
The What-If Plan
What would happen if you were killed or no longer able to work? Though no one wants to think about the What-If Plan, it is equally important to the Best-Case Scenario Plan. When a business owner dies or becomes permanently disabled, the business itself may die or be permanently disabled on the same day – not because something was done wrong, but because nothing was done.
If you have others depending on you for their support, you have a responsibility to get this in order right now. Let’s start with some simple steps to take care of your families. You will need to meet with your financial adviser, your insurance agent and an estate-planning attorney. With a small investment of time and less than a couple of thousand dollars, you can devise and fund a plan to take care of your family if something were to happen to you.
One simple plan that I have seen used is to identify a member of your team that could or would like to take over the business. That individual would take out a life insurance policy on you, and if something were to happen, the insurance would fund the purchase of the business from your heirs.
Once you have prepared for the worst, you can get ready for the ideal way that your succession will happen.
Best-Case Scenario Plan
Once the What-If plan is taken care of, then the happy planning can begin. Even if you are thinking that the sale is many years away, you need to begin planning now. The reason for planning now is that things can and will change over time. When you are 40, you might think 65 is the date you will sell the business. But many things can happen in the ensuing years that could change this date.
Ask yourself some questions: When do I want to sell this business? Who do I want to sell it to? Are there family members or employees who would like to own it? What will I do after I sell the business? There are a couple of thoughts to keep in mind when answering these questions.
First, remember that usually you can either choose who buys the business, or you can choose to sell the business for the maximum value. Rarely do you get both. The other thing to remember is that if you choose the maximum value, you will also give up some say in the timing of the sale. Buyers with money could show up five years before you “planned” on selling. Now what?
The final reminder about your plan is that your business is only worth what it generates in profits. The business is only worth a multiple of that profit number based on how dependent the business is on you. If the business relies on you now, how much would it be worth to a potential buyer?
The time to begin planning is now. Meet with those important to you and ask some questions. If something happened to me tomorrow, what should be done with the business? What would be the best plan for the family, the employees and the customers? What steps do we need to take now to get this plan in place?
Once you have had a discussion about the “what-if” scenario the next step is to discuss the “best-case” scenario. When do you want to retire?
How much money will you need? Who will you sell the business to? Do they have the money? What will you do after you retire? You will need your financial adviser, your accountant, and most likely an attorney that can handle transactions and estate planning.
A few final tips: Discuss with family members your expectations. Discuss with successors the expected handoff date and what needs to happen before that date. Be patient and flexible. The key is to start now. Set a goal to have a plan in place within the next 90 days. Join a Bottom-Line Impact Group to increase profits, increase the value of the business, and get help with your succession plan.
Next week, join us to learn specifics for asking the right questions, decision-making techniques, and the reasons why you should purchase life insurance, draft a buy-sell agreement, and set up a family limited partnership.