Start Your Business with the End in Mind – Why Succession Planning is Important
Katie Lejong, CPA, Landmark CPAs
A comprehensive strategy to get your business up and running should include planning for your own exit. As one of the founders, your departure will have a significant impact on the enterprise itself, your fellow business partners, your customers and your future. So, as counterintuitive as it may seem, how you plan to exit your organization is an important decision to make, even at your business’s onset. Take the time to work with a trusted professional to outline your succession plan so that you are prepared for whatever future you encounter.
There are a few questions you should ask yourself as you create your succession plan.
How quickly do I want to exit the business?
If you want to make a swift exit from your business, you can sell your assets or equity to a private investor or another business. Although there are times when quick exits make sense strategically, most small business owners hope for a different departure. You want to see your entity succeed even after you’re gone, so if you sell to the highest bidder, you lose your ability to influence the company’s trajectory and ensure its continued success.
Instead, you can choose to make a slower and more purposeful exit from the business. For instance, if your daughter plans to take over the company when you retire, you can progressively transfer ownership and responsibilities to her over time. By the time you relinquish your last bit of control, she will understand your vision and feel competent in her abilities to carry out your goals.
What role do I want to play when I leave the business?
When it’s time to leave the business, do you plan to sell your interests outright and invest in a new opportunity? Or do you hope to retain interest in the business throughout retirement? Depending on the type of entity you form, you may be able to hold onto voting or nonvoting membership interests, even after you’ve surrendered your operational responsibilities of running the business day to day. Your team of lawyers and CPAs will need to know your exit goals so they can form an entity that can provide you those options.
Who will take over the business when I leave?
Choose your successor wisely. Selecting somebody who can competently run the business is important, but selecting somebody who will further your vision for the company is critical. You want somebody who shares your values who you can trust to carry on what you’ve built.
When first starting a business, some owners believe that their family members will fit that bill. Before making any assumptions, you should first confirm that your family member wants to take over the business. Even if they say yes, check in with them often to see if they’ve changed their minds. Only a willing participant will make a good successor.
How long will it take my replacement to learn the ropes?
On day one you may not immediately know who your replacement will be, and that’s ok. Instead, you can create an employee training program to groom key workers to take your place. When the time comes to put that plan into action, start small. Ask your candidate to take over one process at a time so you can see if they are up to the task. As you give them more responsibility, do they remain sharp and driven? Somebody who is not a perfect fit now can be groomed to excel as your replacement with the right training program.
Making a Succession Plan: Practical Steps
Your team of CPAs and lawyers should help you with the following practical aspects of creating a succession plan.
- Identify key employees that you think would be good candidates to carry on your business and mentor them.
- Share your knowledge and experience with your key employees and other members of your management team to ensure that you aren’t the only one with all the answers.
- Create well-defined career paths and identify the criteria that your employees will need to meet as they grow in their careers with you.
- Make sure staff members have skin in the game. You want your key employees to feel motivated to carry on the business with pride.
- Make your mission statement for the company public so employees know what your business stands for.
- Foster a positive working environment to avoid high turnover or employee complacency.
- Keep an eye on industry norms for working hours and promotion timelines. You don’t want to lose employees over job dissatisfaction.
- Draft a will that details who will control your ownership rights when you pass.
To download our Top Five Accounting Tips e-book, visit https://www.landmarkcpas.com/top-account-tips-for-your-business/. And if you have questions about or want assistance with developing a succession plan, contact us today.