A business succession plan is a detailed analysis of the business assets, liabilities, equipment, personnel, operations and earnings potential. A succession plan also provides management or the new owners of the business (usually family members) with an outline to follow if there is an emergency. The plan also would provide a formula for passing the business on eventually when the business owner retires or upon death.
Many experts agree that business owners should start planning for the sale of their business the day they start their business. Yet, only approximately thirty-percent (30%) have a written business succession plan.
Before starting a succession plan, owners should keep in mind the following advice:
1) Set realistic succession goals.
2) Think of the plan as a living document. Revisit it once per year and more frequently as retirement draws nearer or in the event of failing health.
3) Decide what qualities the ideal successor should possess. Will the successor be an employee or a family member or will it be an outsider if the company is to continue?
The first step in formal succession planning is to form a team of advisors to plan for the succession. The team is usually composed of the business owners attorney, accountant, banker (if financing is involved), business appraiser, financial planner, and life insurance agent. Before any meetings with the planning team, owners should be prepared to answer the following questions:
A) What should the plan accomplish?
B) What is an acceptable value for the business?
C) When and how will the business be transferred?
D) Who are possible successors?
Owners should also know what role, if any, that they want to play in the business after the sale.
Next, the business value must be determined. This is best accomplished using the services of a valuation expert such as a business appraiser or CPA who spends the majority of his or her time doing business appraisals. This expert should be able to help market the business to potential buyers as well as track sales of comparable businesses.
Some common mistakes business owners make at this point are:
· Talking too much. The competition (they might want to steal the customers) and employees (a mass exodus) do not need to know immediately that a sale may take place in the future.
· Underestimating the value of the business. This is why valuation experts should be consulted.
Next, owners should research the market that would buy the business. The business should then be evaluated as an investment from a buyers perspective. Third, owners should know ahead of time how much money a successor must have to buy and sustain the business. The reason for this is that business owners frequently hold a note receivable for a portion of the proceeds of the sale price or the amount of money paid out may be contingent upon future revenue and/or profits.
When owners are at the point where they are talking to buyers, many make common mistakes such as:
· Thinking a buyer is qualified when he/she is not.
· Talking with only one buyer.
· Disclosing too much information too early in the negotiations.
The last step in succession planning is dealing with the post-sale issues. Former business owners, should have an investment plan ready for the sale proceeds. They should also have new personal plans and goals. They should also remember that the old write-offs, health and disability insurance, club memberships, mileage, etc. no longer apply to them and they must adjust their financial plan accordingly.
A succession plan is just as important as a business plan. The longer planning is put off, the greater the chance that the business owner and his or her family could get hurt.
For further information, contact Louis P. Stanasolovich, CFPä at (412) 635-9210 or mailto:email@example.com