The succession of a business is often the last thing on an owner’s mind, or at least the last thing that the owner wants to deal with.
Unfortunately, as with death and taxes, the transfer of a business is an inevitability that cannot be escaped – and it’s those same two former issues that make the transfer so critical to plan effectively.
Of even more immediate and personal impact, unless an owner intends to travel to the great beyond directly from the shop floor, a well considered succession plan is essential to enable the owner to ease into a stress-free and financially secure retirement.
Ultimately the goal is to provide certainty – either at retirement or death – about who will succeed to the business, and how and when that process will be carried out. The key is to be prepared.
Preparing the successors
Selecting a successor involves a combination of commercial and emotional considerations.
Particularly for a family business, the succession plan is intimately tied to the owner’s estate plan. The owner must not only decide on the appropriate successor(s) but also be prepared to deal with those who are not chosen, and the possibility that the business will have to be transferred to management or sold outright to strangers.
Some issues to consider:
- How should family and management be involved in the succession decision?
- How and when should the decision be communicated?
- How will the estate be equalized for the non-successor(s)?
Once the decision has been made and communicated, the job of preparing the successors begins. Depending on the nature of the industry and on the style of the existing owner, the transition can take weeks, months … and often years.
Clearly, leaving the succession to chance exposes the business to a level of risk that could result in unintended results, and possibly a total loss of the enterprise.
Preparing the business
The most effective succession plans flow naturally from the existing business. A seamless ownership transition can be facilitated by conscientious record-keeping, people-independent management systems & policies, and general good organization.
An acid test for the owner is to consider what would happen if that owner were to take an extended vacation for 3 to 6 months,
- If the business’ operations are significantly impaired or would grind to a halt (or if the owner gets no sleep while away), it is likely that the only thing to be transferred is a job obligation
- If the business remains pretty much intact, there is a true business opportunity to be passed along
To the extent then that the business preparation fundamentals are in place, the time required to transition the business to successors will be minimized, and the chances for success will be maximized.
Preparing the transaction
Essentially the agreement of purchase and sale is a formal legal record of the business decisions that will have already been made during the foregoing preparation stages.
For many owners, there is a certain amount of comfort gained by knowing the general content of such a document. It covers things such as:
- Identifying parties, relationships among them and relationship to the business
- Statement of the transaction subject matter, price determination and payment method
- Parties’ representations about themselves and commitments to one another
- The closing agenda, including conditions, time, place and documents to be delivered
- General legal provisions to give effect to the agreement
Finally, as with many matters in life and in business, the best laid plans can go for naught without the financial wherewithal to see them through to conclusion. Whether it is by sinking fund, insurance or a combination of the two, the job of preparing a business for succession is not complete until succession funding is arranged.
The bottom line
Planning a succession can be the most challenging business task an owner can face, but it need not be a daunting one. Knowing these fundamental steps can allow an owner to maintain business as usual for now, for retirement, for life and beyond.