Four Things Business Owners Should Consider for Succession Planning
Entrepreneurs spend a lot of time talking about the trials and tribulations of trying to build a successful business, but rarely do you hear us espouse on the importance of planning for when we might exit our business. I am not talking about the infamous “exit strategy” and selling for multiples of EBITDA. I am gently referring to the inevitable “exit.” I don’t care if you are 40 years old or 80 years young, if you are a business owner you should make sure you have planned for the worst. On average, 45% of a business owner’s net worth is tied up in the business (LIMRA International, Small Business Owners 2005 Report). While it may sound like a grim topic, the death of a small business owner could lead to internal turmoil, customer erosion and disruption in revenue flow. Quite simply — planning just seems like the smart thing to do, but only 26% of small business owners have some type of succession plan in place. (LIMRA International, Small Business Owners 2005 Report)
So, where do you start? There are several important elements to help you plan for the unexpected and how you go about it depends upon the ownership structure of your business and your intentions. I am a far cry from a lawyer, but my partner and I have spent time talking about the options and putting plans into place. Some options you might consider include:
1. Have you granted a key manager a limited power of attorney so that he or she has the authority to make decisions and continue operating the business?
2. If you have a business partner(s), do you have a buy-sell agreement in place? You can look at a cross-purchase plan, in which each of you owns a life insurance policy on the other so that the partner can use the death benefit to purchase your share of the business. You can also consider an entity purchase or stock redemption plan.
3. Perhaps you should establish an advisory committee to act in the immediate days and months afterward? If your company has several executive level employees, this committee could be given the authority to make key decisions by consensus until a stronger team is in place.
4. Several entrepreneurs I know have established an employee stock ownership plan to insure that a buyer is available when the inevitable happens.
No one likes thinking about their mortality, and entrepreneurs are no exception. But these simple planning tools will ensure the continuation of the company you worked hard to build, while offering your staff, bankers, clients and partners an important sense of security.
Here’s to hoping we never have to put these plans into action.
~ Laura Love