Building Your Ideal Business Succession Plan

Father and son standing in the kitchen of their pizzeria.

By Odaro Aisueni, CFP®, Wealth Planning Administrator

As a small business owner, you’re likely so immersed in the routine functions of your business that you haven’t yet put much thought into the day you leave it behind. In fact, most small business owners have so much purpose tied up within the business that the thought of bringing their time to a close can be daunting.

Yet while succession planning is often overlooked, it holds immense significance for your future well-being. A well-crafted succession plan ensures a smooth transition and guarantees the long-term viability and prosperity of your organization while ensuring you’re financially equipped for your ideal retirement.

Whether you’re hoping to pass your family-owned business to the next generation, a thriving solo practitioner aiming to cultivate internal talent, or you’re considering a third-party sale, developing a comprehensive succession plan is essential. Here are some key insights that will help you navigate this critical process to safeguard the future of your business.

Succession Planning Should Start Earlier Than You Think

One of my former accounting professors shared a thought that has stuck with me, “Every company has an expiration date.” Translation: You have to accept there will be a transition at some point. To accomplish this on your terms, I encourage business owners to consider succession planning as something that begins the day they start their business – it’s not that you’re ready to transition out immediately, but rather that you’re building your business with a successful end in mind.

Most small business owners understandably have a powerful emotional tie to the organization they’ve built. Yet, at the end of the day it is a business – and it’s where many owners have most of their assets.

So, from an economic standpoint, it’s essential to plan for the future as that’s likely where you will realize the bulk of your lifetime wealth. The best advice? Start succession planning as soon as you start the business, or as I like to say: “now.”

Key Components of a Successful Business Succession Plan

The term “succession planning” sounds vague, which is another reason it’s easy to put off. It might help to start thinking about the areas you’ll need to consider. A succession plan should have four key components, many of which are intertwined:

Timing: While I mentioned that the time to start should be now, this aspect relates to when you want your transition complete while recognizing the timeline might shift. Ideally, you’ll be considering a distant timeframe – such as a 10- to 20-year period, rather than six months or a year. The longer the interval, the more options you’ll have as you consider strategies to build your business’s value.

Compensation: This refers to how you intend to be compensated for the business. There are multiple alternatives with different benefits, which is why it’s critical to discuss the pros and cons with a financial planner. Many owners choose to sell the business outright to a family member, an executive or a third party; while others prefer deferred compensation as they stay involved. One popular option is setting up an employee stock ownership plan (ESOP), where employees are technically buying equity in the business through a retirement plan. That can also help to retain key talent since equity promotes a sense of ownership, which can lead to loyalty and improved performance.

Tax planning: This aspect must go hand in hand with your desired compensation, as the impact the sale has on your taxes may point you toward extending your payout, rather than taking a lump sum. Remember, the number that matters is not how much you sell the company for, but how much you end up with in your pocket.

Estate planning: The family impact of your succession plan is greater than most business owners appreciate. We often see a scenario where someone has been running an organization for 20 years and something suddenly happens to them, leaving the family with a company they aren’t equipped to oversee. With solid planning, you can avoid putting a family member in the difficult position of assuming control of something they aren’t qualified for or interested in. One common option is arranging a buy/sell agreement with another owner so the family member can be compensated, and the other individual is given direct control of the business to continue to keep it viable.

How Succession Planning Affects Personal Financial Interests

It’s not an exaggeration to say that small business owners have collectively lost out on billions of dollars due to a lack of early succession planning. While every small business is different, many are considered “lifestyle practices,” in that they are owned and managed by the founder or sole proprietor who usually maintains the status quo without expanding headcount or revenue. As the sole proprietor approaches retirement age, the business begins to wind down too.

However, that doesn’t have to be the case. With a proactive exit plan, these business owners could enjoy both personal and financial benefits by exiting more gracefully and building the company’s value so it can successfully continue without them.

Seeking a business valuation can help identify which levers you can pull to build on your company’s strengths, creating more value so the business is better positioned when it’s time to sell. Additionally, during this process many owners realize they can begin to scale back their involvement, segueing into a consultant role and expediting their freedom rather than enduring the stress of shouldering the entire company themselves.

The Key Role of a Financial Advisor in Building the Ideal Succession Plan

As a small business owner builds their ideal succession plan, they’ll need to lean on a holistic team of professionals. Often, the financial advisor is tapped to serve as the quarterback, with support from a robust group that might include an exit planning strategist, an attorney and a tax planner, to name a few.

It’s difficult for small business owners to understand the amount of support that’s needed until they’re in that position. For example, when I worked at Chipotle during college, I got a front-row view of the seemingly endless pieces that went into the process of getting a burrito to a customer. It was much more than just whipping up some food in the kitchen; we had distributors driving certain packaged goods cross-country while others were delivered fresh locally. Operating the restaurant required lots of coordination between systems, people and more. I gained an appreciation for the delicate dance that takes place among all these working parts, which is similar to what business owners discover when they embark on succession planning — one person can’t handle all the details to successfully get you to the finish line.

By creating a comprehensive succession plan, small businesses can ensure continuity, preserve their legacy and sustain their success even after they retire. Are you ready to take the next step to start putting a viable exit strategy in place? Contact us to start exploring your options today.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

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