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Making a Risk Management Plan for Your Business

It’s impossible to eliminate all business risk. Therefore, it’s essential for having a plan for its management. You’ll be developing one covering compliance, environmental, financial, operational and reputation risk management. These guidelines are for making a risk management plan for your business.

Developing Your Executive Summary

When you start the risk management plan with an executive summary, you’re breaking apart what it will be compromised of into easy to understand chunks. Even though this summary is the project’s high-level overview, the goal is describing the risk management plan’s approach and scope. In doing so, you’re informing all stakeholders regarding what to expect when they’re reviewing these plans so that they can set their expectations appropriately.

Who Are the Stakeholders and What Potential Problems Need Identifying?

During this phase of making the risk management plan, you’re going to need to have a team meeting. Every member of the team must be vocal regarding what they believe could be potential problems or risks. Stakeholders should also be involved in this meeting as well to help you collect ideas regarding what could become a potential risk. All who are participating should look at past projects, what went wrong, what is going wrong in current projects and what everyone hopes to achieve from what they learned from these experiences. During this session, you’ll be creating a sample risk management plan that begins to outline risk management standards and risk management strategies.

Evaluate the Potential Risks Identified

A myriad of internal and external sources can pose as risks including commercial, management and technical, for example. When you’re identifying what these potential risks are and have your list complete, the next step is organizing it according to importance and likelihood. Categorize each risk according to how it could impact your project. For example, does the risk threaten to throw off timelines or budgets? Using a risk breakdown structure is an effective way to help ensure all potential risks are effectively categorized and considered. Use of this risk management plan template keeps everything organized and paints a clear picture of everything you’re identifying.

Assign Ownership and Create Responses

It’s essential to ensure a team member is overseeing each potential risk. That way, they can jump into action should an issue occur. Those who are assigned a risk, as well as the project manager, should work as a team to develop responses before problems arise. That way, if there are issues, the person overseeing the risk can refer to the response that was predetermined.

Have a System for Monitoring

Having effective risk management companies plans includes having a system for monitoring. It’s not wise to develop a security risk management or compliance risk management plan, for example, without having a system for monitoring. What this means is there’s a system for monitoring in place to ensure risk doesn’t occur until the project is finished. In doing so, you’re ensuring no new risks will potentially surface. If one does, like during the IT risk management process, for example, your team will know how to react.


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Business Succession - 7 min read

How to Write a Succession Plan for Small Business

With a well-executed succession plan, the business you’ve built can continue to thrive and grow long after you’ve stepped away from the helm.

But how do you develop a succession plan? And amid your hectic schedule, when will you ever have time to tackle such a project?

Before we delve into these questions, let’s take a glance at the essential components of an effective business succession plan .

What Types of Businesses Need Succession Plans?

Succession plans aren’t just for large businesses. Small businesses need succession planning as much as any ASX200 company. Regardless of your company’s industry or size, you need a succession plan if you want a successful outcome for all of your hard work.

Consider these possible succession problems: conflicting family interests, market uncertainty, opportunistic employees just waiting for their chance to derail the status quo. It sounds dramatic, and it certainly can be. Avoid the drama and provide your business with a smooth transition by writing a foolproof succession plan.

Is succession planning simple? Unfortunately, it’s not. It requires careful consideration and a proposed approach. But your efforts will be rewarded with a profitable transition.

The Succession Planning Process

Surprisingly, succession planning isn’t just about the future. It also affects how your business operates today. In fact, most business owners find that creating a succession plan improves their current operations and opportunities in startling ways.

Your current operations will give you a starting point for devising a plan to protect the following:

To secure these benefits, business owners should include the following items in their succession planning process.

Development of Future Business Leadership

Preparing successors for leadership is one of the most important aspects of a succession plan. You’ll need to thoughtfully consider who wants to be a leader, who matches the business’s objectives, and who presents risks.

People come and go, so don’t pin all your hopes on one person. Instead, define essential roles and analyse your current talent crop. Your goal is to prepare them well for their future responsibilities.

Analysis of Corporate Finance Structure Options

The business’s structure affects taxation and how easily you can transfer wealth. The most advantageous structural options allow businesses to grow and transfer wealth without incurring heavy taxes on stakeholders. Your financial adviser will be able to help you determine which options will work best for your business.

Business Valuation

The value of a business can change dramatically over time, and the value can be different depending on the purpose of the valuation. Business valuation can be divided into three categories: fair market value, investment value, and liquidation value.

With accurate valuation data at the ready, you’re prepared to evaluate offers, consider mergers or weigh other opportunities as they arise.

The valuation of your business may change substantially before you exit, but a proper assessment will assist your succession planning. It can help you to make appropriate long-term plans about divisions, transfers, and consolidations.

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Family business succession planning.

Family-owned businesses face additional issues that can be smoothed through thoughtful business succession planning.

Generational Transition

Successfully handing a business down from one generation to another is difficult and emotionally charged. You may need to deal with unequal wealth transfers, resentment, diverse family structures, jealousy, and other troublesome issues. A thoughtful succession plan can minimise these issues and keep communication clear and open.

Alignment of Family Interests

The older generation may be counting on the family business to fund their retirements while the younger generation may have different ideas about the direction of the business. Again, working through the details of a succession plan can help to align family interests and avoid conflict.

Balanced Financial Returns

Buyout agreements can cause contention within a family business. When the retiring generation looks to the value of their interest, they tend to look at the bottom of the balance sheet.

However, the true value of a business should be based on an earnings capitalisation model instead of the balance sheet number. Working through this concept can be difficult, but it usually results in a fairer plan for all parties involved.

Start Your Succession Plan Now

You’ll achieve the best results from your succession plan when you begin early. The sooner you start, the more time you’ll have to implement your plan, mentor future leaders and prepare your business to transition.

If you’re working through your own succession plan or needing help getting started, contact us at Altus Financial . With objective, third-party expertise at your side, you can work through the issues and prepare yourself for success.

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Small Business Succession Plan 101

Do you have a business succession plan in place? Here’s why this is important, how to identify potential successors, and how to create your plan.

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Small Business Succession Plan 101

Here's what you need to know:

According to Deloitte, only 1 in 4 private company boards has a succession plan in place. For small businesses, the number of business owners who have a documented business succession plan is even lower, with just 1/3 being prepared for an eventual transfer.

Part of the problem is that the idea of succession appears to be in the distant future. However, pushing business succession planning into the background can backfire, leaving a business owner unprepared for a sudden sell-off or merger. As a result, a small business owner can also leave money on the table.

Drafting a succession plan is the first step toward a successful transition and ensures that the business owner gets a better deal.

What is a business succession plan?

A business succession plan is more than transferring ownership to a family member, which is common in family business succession planning. In fact, there are 4 common business succession plans:

1. Passing the business to a family member

In this case, a small business owner passes their business onto a child or another family member. This is often the most attractive option for a family-owned business. However, it’s important to have a thorough discussion with the family to determine whether anyone actually wants to take it over.

Sometimes it is assumed that a potential successor will want to continue the business. But people change over time, and it’s critical to regularly access whether or not the business is their passion.

Furthermore, to ensure a successful transition, a business owner should leave clear instructions on who will take over the business, and whether other family members should require compensation.

2. Selling to a co-owner

Businesses that have 1 or more owners typically have a loose succession agreement in place in the event that 1 of the owners is unable to continue working. However, it’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.

It’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.

The main downside to this is that if a co-owner wants to buy the business, they will need a lot of cash on hand. Furthermore, if the agreement stipulates that the co-owner should buy the remaining shares upon the death of their business partner, payment can become tricky. Life insurance is often used in this case.

3. Selling to an employee

While there are many candidates for a successor, the best may come from the employee pool. A business-minded employee may be able to keep the business profitable and even expand it.

However, employees typically don’t have the funds to buy a business. In this case, they usually pay the business owner in installments over time.

4. Selling your business to another company or outside owner

You may choose to sell your business to a new individual altogether. Unlike planning for a business partner, family member, or employee to take over the business, bringing in an outside party is often unplanned and unpredictable.

For this reason, it can be helpful to rely on experienced business transition experts to help you navigate the specifics of agreements and strategy.

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5 tips for creating a business succession plan

1. have a plan before you decide to sell your business.

In addition to identifying your potential successor, you will want to define an ideal timeline and price range based on your business valuation. When will you want to retire? How long should the succession plan take?

What procedures need to be taken over? How can you streamline your process to make the transition as simple as possible?

2. Include key stakeholders in succession plan decisions

You will want to include your family, trusted friends, financial advisors, and business lawyers, as well as any other potential stakeholders such as upper management or key employees. This will not only help you plan what needs to be done, but you will also have a better idea of a timeline for when you sell.

3. Decide on your minimum requirements for payment

You should already have a general idea of how much cash you want in-hand and how you would like to be paid. Keep in mind that family members, employees, outside sources, and co-owners will all likely have a different payment plan and expectations.

4. Work with a succession planning professional or group

You will want to have a business broker or group that specializes in business transactions, especially when working with an outside buyer. This can be your CPA, a local attorney’s office, a mentor from SCORE, or even a specialist from your financial institution.

Having an expert in the field can ensure that your succession plan is solid, your exit strategy is clear, and that you don’t leave any money on the table.

5. Create a plan for your life post-succession

Finally, you need to have an idea of your life after the transition. Do you want to start another business? Where are you going to invest the money from the buyout?

A small business owner who is used to having $3 million in revenue can suddenly find themselves with $30 million in the bank. Having personal and financial support systems in place can ensure that you have a fulfilling post-succession life.

Business succession planning checklist

When putting together your business succession plans, it’s likely that you’ll have a lot of pieces to juggle. Here are some key considerations to get you started:

Plan your business, automate everything else

It’s hard to make time to think about the future when you have a million tasks to complete in the present. But it’s possible to kill 2 birds with 1 stone with automation.

Using automation and templates in your business does 2 things. First, it takes some work off your plate. And second, it helps to systemize your business operations. This, in turn, makes it easier to sell your business down the road — even if you don’t have a plan in place.

To get started, check out these free templates for your HR and hiring needs:

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Do you think succession planning is just for family businesses or for business owners who are close to retirement? Think again.

Whether retirement is 30 years away, just over the horizon, or not in your game plan at all, a succession plan is vital to ensuring the continued success of your business.

A good succession plan can help:.

Why is a succession plan so important?

Life happens—and unless you have a plan to deal with the unexpected, the business you worked so hard to build could crumble if you become disabled, die, get divorced, or decide to split with your business partner.

Think of a succession plan as peace of mind for the business you’ve worked so hard to build.

In this guide, learn how to develop a succession plan that works for your business.  

Some items covered include:

1. Decide how to exit your business. Should you:

2. Conduct a business valuation

Even if you aren’t planning to sell your business, conducting a business valuation has many benefits. It helps you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance for protection planning. It can even make it easier for your business or potential buyers to get loans or attract investors.

3. Prepare for the transition

The transition period to new ownership is a vulnerable time for a business. Prepare both your successor and your business for a smooth hand-off.

4. Review your plan regularly

Creating a succession plan is a big accomplishment, so give yourself a pat on the back. But don’t just file your plan away and forget about it. Over the years, key employees may leave your business, family members may lose interest in taking the reins, and your own plans for your future may shift. Reviewing your succession plan annually with your team of advisors will help ensure a successful and seamless transition — no matter when or under what circumstances it happens.  

Founded in 1851, MassMutual is a leading mutual life insurance company that is run for the benefit of its members and participating policyholders. MassMutual provides products to help meet the financial needs of clients, such as life insurance, disability income insurance, long term care insurance, retirement/401(k) plan services, and annuities.

Covering Your Back: The Buy-Sell Agreement Whether you’re launching with one partner or 10, the buy-sell agreement protects stakeholders from sticky situations that could rock the entire boat.

7 Legal and Financial Steps to Closing Your Small Business Exiting a business requires filing paperwork to officially dissolve your business with the state and taking care of other legal and financial formalities.

Copyright © 2023 SCORE Association,

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

Having a succession, or exit, plan in place will help you to smoothly transition out of your business.

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At some stage you will decide to leave your business; perhaps you have decided to sell, retire or do something else.

Regardless of the reason, having a succession (or exit) plan in place will help you to smoothly transition out of your business.

You can start succession planning years ahead of time; having a plan can be useful if there is an unexpected event, such as illness or death. Without a plan the future of your business can be at stake. Early planning also helps you to maximise the value of your business.

Developing a plan

Make sure your succession plan is realistic and achievable. You may want to discuss it with your business adviser, accountant or lawyer. There are no set rules about what to include in a succession plan, however you may want to include details of:

You can download a succession plan template from

Keeping the business in the family

If you decide to leave your business to a family member consider the legal obligations, as well as the impact on family relationships.

Consider involving a lawyer or business adviser in discussions with family members to avoid disputes relating to inheritance, ownership or management.

Family Business Australia provides advice for family-run businesses.

Buy-sell agreement

A buy-sell agreement is a legally binding agreement between partners or co-owners outlining what will happen if an owner dies, is forced or chooses to leave.

The agreement will determine:

Other options

You may also consider other exit options such as:

Your accountant can advise on the best option.

Review your plan

Once you have created a succession plan make sure you regularly review it especially when circumstances change.

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Succession Planning for Small Business - A Step by Step Guide

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If you own a small business, having a succession plan is essential. Succession planning  in advance will save you a lot of work and stress later on for when and if you want to retire from the company. Additionally, unexpected life events happen, and unless you have a plan, the company you worked hard to build could crumble. You may not be planning to leave your business, but unplanned exits do happen. Generally, the closer a business owner gets to retirement age, the more urgent the need for a plan. However, succession planning isn’t just helpful to prepare for eventualities. 94% of employers have said that creating a succession plan increased employee engagement because it demonstrates to them how their future up the career ladder could look. It also increases transparency among those in leadership roles because it shows the direction the company is headed. But what exactly do succession plans do?

A succession plan is a document that acts as a guide through a change in ownership by providing step-by-step instructions. If a purchase is going to happen, the sale price and purchase terms are clearly outlined to relieve stress for the departing owner’s family and leadership team. A succession plan aims to benefit everybody: the former owner, the business, the employees, and the successor. This step by step guide will help you create a succession plan to give you peace of mind.

Step One: Decide How to Exit Your Business

The first step in succession planning is deciding how you want to leave your business. Your options are to transfer the business to your heir or heirs, sell the business to your business partner or key employee, sell the business to an outside buyer, or to close or liquidate the company.

Many small business owners work for years to build a company so they can pass the company to their heirs. However, there are plenty of questions to answer before deciding on this route. Do you have someone in your family who wants to operate the business? Is there more than one family member who wants to take over the company? Will multiple family members own equal interests in the business or receive equal distributions of profits? These questions and others need to be answered as soon as possible so you can develop a business succession plan in the best interest of both you and your family.

If no one in your family wants to take over the company, you may sell the business to a key employee. There are several options for this, including financing the sale over multiple years as the employee is trained in how to run the business. Your successor can also obtain a business loan to finance their purchase.

If you do have a business partner, you may not have a choice for how to hand over your interest in the company. When a business is started, the partnership agreement drafted generally dictates how the partnership interest may be transferred when one partner exits the company. Talk to your partner about their role in succession planning.

Selling the company to an outside buyer may help maximize your profit. However, finding the right buyer for the company may be more difficult than the previous options. This is because, when selling your small business to a third party, you need to take numerous steps to prepare your business for the sale, including organizing the books, preparing a business valuation, gathering documents and records, streamlining operations, and analyzing potential weaknesses that must be addressed before marketing the company. A business attorney can be helpful for many of these tasks.

It is essential to perform many of the same tasks when liquidating your company as you would in selling the company to a third party. Maximizing your profits requires some work in advance.

Step Two: Find Your Advisors

If you don’t have an attorney, accountant, and financial planner, you may need to hire them to help with your succession planning. These professionals will serve as your team of advisors to ensure that you have addressed all of the legal, tax, and family issues necessary for a successful transition. They can also help you with the next two steps: a business valuation and your company succession plan creation.

Step Three: Value Your Business

Even if your plan isn’t to sell your business, a business valuation has many benefits, whether you mean to sell to a third party, liquidate, or transfer the business to a family member. It helps you create a retirement income strategy, value the future owners’ shares, and purchase adequate insurance for protection planning. A valuation can also make it easier to get loans or attract investors. A hired expert can deliver the most accurate valuation for your business. Business valuations are based on many factors, including but not limited to revenue, earnings potential, debts, assets, goodwill, and current market value.

Step Four: Create Your Succession Plan

Next, put the plan in writing, with your advisors helping. Critical sections of the business succession plan should cover topics such as succession details, organization structure, potential key personnel changes, legal registration requirements, standard operating procedures (SOPs), training programs, financing options if applicable, and insurance. Necessary legal documents, such as a buy and sell agreement, trust agreements, and transfer documents should be created or gathered. A timeline should also be put into writing, along with tax implications, a plan for dispute resolution, risk management, and contingencies.

Questions to Consider for the Succession Planning Template

No succession planning template is one-size-fits all, so whichever you use, you’ll need to tailor it to your specific situation. During the succession planning process, ask yourself questions like: 

Will the person leaving still be partially involved in the company? Are there co-owners who this plan will also apply to, or will they have their own succession plans?

Am I planning for a sudden emergency situation or a controlled succession process during a defined period of time? What will happen during a temporary absence?

What will be the timeline for a controlled succession plan? What will the major steps be during that time and the deadlines to complete them? 

Who will be taking over the company? (Succession candidates can include a co-owner, an employee, a family member, an outside buyer you know, or an unknown buyer you’ll find after you put the company up for sale.)

What skills , certifications and experience will the succession candidates need to have, and what will they need additional training in? This should include leadership skills and experience as well as skills and experience within the sector. 

What other key positions will need to be filled, especially if you’re promoting from within? Will the company organizational chart change?

For an emergency succession, what will trigger the plan into action? Which employees will take over each key function left vacant? Who will communicate information and what will the communication time frame look like?

For a long term succession rising from an emergency, who will sign checks and contracts? This is also when you want to plan for a more permanent succession candidate to take over.

What documents will the new executive need? This may include a daily operations manual, an employee handbook, an organizational structure chart showing critical positions, an IT manual, a list of training programs, skill retention strategies, performance management, and meeting agendas for regularly occurring meetings. 

How much will your company be worth? (This is where the business valuation comes in). How will you determine its selling price, and if you’re going to list the company for sale, what’s the lowest price that you’re willing to accept?

How will the payment for the company work? 

Will you want an upfront payment? In that case you may need to prepare to give information about your company for the buyer to get an acquisition loan.

Will you accept payments over time? For that you’ll need to establish a down payment, a length of time to pay off the debt, and an interest rate.

For passing the business to a family member, you may also want to consider life insurance as a form of funding, and whether it will be permanent insurance (in case of injury or retirement) or term insurance (in case of death). 

For more specific situations, such as for a nonprofit, a law practice, or a family business, specific succession planning templates can be found here and here .  

Step Five: Review and Revisit Your Plan

Once your succession planning is finished, review it with any owners, successors, family members, and employees in leadership roles. These stakeholders should consult with their estate planning lawyer to ensure that their estate plans minimize taxes, protect company assets, and facilitate the business’s efficient and practical transfer to heirs upon their deaths. Creating a succession plan is a significant accomplishment, but it doesn’t end there. Succession plans are useless if you file them away and forget about them. Over time, employees in key positions may depart the business, family members may change their minds about taking over, and your own future plans may shift. Your business may also experience unexpected growth, or your planned buyer may back out. To help ensure a seamless transition, review your succession plan annually with your team of advisors and keep those in leadership positions in your company updated on changes.

Succession planning is not a one and done process, but it can save you, your family, and your employees a lot of stress in the future. Above, we gave a step-by-step guide on succession planning for small businesses. We hope this information has been helpful to you. If you want to learn more about related topics, check out Thomas Insights and industrial guides , or, to make your own custom shortlist of suppliers, visit the Thomas Supplier Discovery , which has information on suppliers.

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How to Create a Business Succession Plan

succession planning for small business owners

For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

For business owners that are at or near retirement, the issue of succession cannot be ignored. In this article, we will take you through the steps you'll want to take to create a successful succession plan.

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to sell the business lock, stock, and barrel simply. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose — each with a number of strengths and weaknesses to be considered. In this case, a lasting resentment by those who were not chosen may happen, regardless of what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement .

How Much Is the Business Worth?

When business owners decide to cash-out (or if death makes the decision for them), a set dollar value for the business needs to be determined, or at least the exiting share of it. This can be done either through an appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner's interest will be determined by the stock's current market value.

Life Insurance: The Standard Transfer Vehicle

Once a set dollar value has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner's share of the business and distribute it equally among the remaining partners.

There are two basic arrangements used for this. They are known as "cross-purchase agreements" and "entity-purchase agreements." While both ultimately serve the same purpose, they are used in different situations.

Cross-Purchase Agreements

These agreements are structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured. Therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner's share of the business at a previously agreed-upon price.

As an example, imagine that there are three partners who each own equal shares of a business worth $3 million, so each partner's share is valued at $1 million. The partners want to ensure that the business is passed on smoothly if one of them dies, so they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. This way, when one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner's share of the business.

Entity-Purchase Agreements

The obvious limitation here is that, for a business with a large number of partners (five to ten partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

There can even be problems when there are only two partners. Let's say one partner is 35 years old, and the other is 60 years old — there will be a huge disparity between the respective costs of the policies. In this instance, an entity-purchase agreement is often used instead.

The entity-purchase arrangement is much less complicated. In this type of agreement, the business itself purchases a single policy on each partner and becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.

3 Reasons to Have a Business Succession Plan

Creating and implementing a sound succession plan will provide several benefits to owners and partners:

The Bottom Line

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision.

American Bar Association. " Forms of Stock Purchase Agreements ," Page 1.

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Buying and Selling a Business | Ultimate Guide

Business Succession Planning: 5 Ways to Transfer Ownership Of Your Business

Robert Newcomer-Dyer

WRITTEN BY: Robert Newcomer-Dyer

Published October 11, 2019

Robert has over 15 years of experience in sales leadership, finance, and business development. His expertise is highlighted throughout Fit Small Business in content around startup financing, business loans, and buying and selling a business .

Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best selling arrangement. This usually involves a buy-sell agreement, secured with a life insurance policy or loan.

There are five common ways to transfer ownership of your business:

How a Business Succession Plan Works

A business succession plan is a document that is intended to guide through a change in ownership by providing step-by-step instructions. If a purchase is involved, the sale price and purchase terms are clearly outlined, relieving stress for the departing owner’s family. A well-crafted succession plan aims to benefit everybody—the departing owner, the business, employees, and the successor.

A small business succession plan should include the following:

Who Should Create a Business Succession Plan

Succession plans are commonly associated with retirement; however, they serve an important function earlier in the business lifespan: If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss. As the complexity of the business and the number of people impacted by the exit grows, so does the need for a well-written succession plan.

You should consider creating a succession plan if you:

Many business owners ignore succession planning because they don’t believe it’s necessary or put it off until they’re ready to retire. For small, simple businesses, a succession plan may not be necessary. However, consider what would happen to your business if you were no longer able to run the day-to-day operations. Who would take over? Would the business be viable?

When to Create a Small Business Succession Plan

Every business needs a succession plan to ensure that operations continue, and clients don’t experience a disruption in service. If you don’t already have a succession plan in place for your small business, this is something you should put together as soon as possible.

While you may not plan to leave your business, unplanned exits do happen. In general, the closer a business owner gets to retirement age, the more urgent the need for a plan. Business owners should write a succession plan when a transfer of ownership is in sight, including when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition.

The 5 Common Types of Succession Plans

There are several scenarios in which a business can change ownership. The type of succession plan you create may depend on a specific scenario. You may also wish to create a succession plan that addresses the unexpected, such as illness, accident, or death, in which case you should consider whether to include more than one potential successor.

Here are the five most common types of small business succession plans in detail.

1. Selling Your Business to a Co-owner

If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin.

This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation, and allows the remaining co-owners to maintain control of the business.

Potential Drawbacks

A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner should be prepared to buy-out your shares, theoretically, at any moment. Many businesses will fund this plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death. Permanent life insurance is a bit more expensive with the added benefit of a payout in the event of retirement or disability.

If you choose to draft a buy-sell agreement with your co-owner, you’ll want to make sure a life insurance policy is stipulated in the agreement. The company can also purchase key person insurance that pays out in the event a key member of the business dies or becomes disabled. We recommend speaking with an expert for specific help on the type of policy you’ll need.

2. Passing Your Business Onto an Heir

Choosing an heir as your successor is a popular option for business owners, especially those with children or family members working in their organization. It is regarded as an attractive option for providing for your family by handing them the reins to a successful, fully operational enterprise. Passing your business on to an heir is not without its complications.

Some steps you can take to pass your business onto an heir smoothly are:

Failing to address these steps may lead to a chaotic transition. For example, if a future leadership structure is not implemented, and the business passes on to more than one heir, the resulting power struggle may negatively impact the business. Alternatively, each heir may incorrectly assume the other will take over day-to-day responsibilities.

Before instructions can be given on who will take over leadership of the business, a future leader should be chosen. This is likely to be complicated when more than one heir is interested in taking over. Business owners can reference current business contributions and responsibilities from potential heirs to assist in choosing a successor.

Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. Further, second-generation businesses rarely survive the transition, as they’re often sold by the inheriting family member, or fail outright. Only about 30% keep the same name and ownership following an inheritance.

Altogether, this should beg the question; is inheritance even the best idea? If your successor is skilled and business savvy, then perhaps the answer is “yes.” If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead.

3. Selling Your Business to a Key Employee

When you don’t have a co-owner or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. Your org chart can help with this. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer.

Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.

A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge.

One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full. The exact terms of the loan will need to be negotiated and then laid out clearly in your succession plan.

4. Selling Your Business to an Outside Party

When there isn’t an obvious successor to take over, business owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly, and that the valuation is updated frequently.

This is easier for some types of businesses than others. If you own a more turnkey operation, like a restaurant with a good general manager, your task is simply to demonstrate that it’s a good investment. They won’t have to get their hands dirty unless they want to and will ideally still have time to focus on their other business interests.

Meanwhile, if you own a real estate company that’s branded under your own name, selling could potentially be more challenging. Buyers will recognize the need to rebrand and remarket and, as a result, may not be willing to pay full price.

Instead, you should prepare your business for sale well in advance; hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers.

One of the main drawbacks to an outside sale succession plan is the unexpected: It’s nearly impossible to predict exactly what the sales process will have in store. The process of selling a business to an outside party is complex and could encounter roadblocks like: your business not being as valuable as you anticipated, lack of credible buyers, your business not being able to sell at all, and more. Business brokers, like VNB Business Brokers , are experienced and well-versed in all aspects of selling and purchasing businesses on their clients’ behalf.

Consider outsourcing to a business broker so that you can focus on running your business and maintaining its value while professionals handle the sale. In addition to taking care of potential problems, VNB will ensure all steps of the process including finding and vetting buyers, structuring your deal, preparing documents, and negotiating terms. After one quick call, VNB Business Brokers will be able to tell you things like: what your business is worth, if the valuation price can be increased and how long it will take to sell your business.

Schedule a free consultation today and find out what the next step is.

5. Selling Your Shares Back to the Company

The fifth option is available to businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business.

An entity purchase is similar to a cross-purchase, in which you sell your shares to a co-owner or co-owners. In most circumstances, a cross-purchase is more financially viable. When co-owners purchase shares directly, they get a “step-up in basis,” which means the stock’s basis is revalued at its current price. With an entity purchase, the original basis remains, and your co-owners will be liable for potentially higher capital gains.

Despite this drawback, entity purchases can still be beneficial when you have a large number of co-owners. Drafting cross-purchase agreements with each owner can be cumbersome. An entity purchase agreement, in comparison, is much simpler to implement. It can typically be funded with a single life insurance policy for each co-owner.

How to Create a Succession Plan

There are several key steps necessary to create a comprehensive small business succession plan, and several ways to go about creating your plan. Some business owners may choose to create their own succession plan, while others may wish to engage the help of a professional, depending on the complexity of the plan and the business.

Whether you create your plan yourself or engage a professional, the five steps to writing a succession plan are:

Small Business Succession Planning Providers

Creating a small business succession plan can be complicated, and many business owners choose to engage a professional third party to help them determine the value of the business, the type of succession plan, and create any supporting documentation. The choice of provider may be based on the complexity of the business as well as the event being planned for.

For small businesses with multiple employees and simple to complex finances, a local CPA may be a viable option, or you might consider hiring a business attorney to help you draft the paperwork. For more complex scenarios, a business attorney and CPA should likely be involved, to ensure that everything goes smoothly when the succession plan kicks in.

Finally, for larger, more complex businesses, business owners may wish to consider working with an accounting firm with extensive experience in creating business succession plans. There are hundreds, if not thousands, of such firms. Business owners can start by researching local firms or may choose to work with one of the so-called “Big Four,” such as PriceWaterhouseCoopers—operating as PwC—which specializes in privately held businesses.

Succession Planning Pro Tips

Asghar Kazim

1. Avoid common mistakes

Asghar kazim, cfp, chfc, clu, principal & co-founder, united wealth group llc ..

“One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things and, for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things.

“For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? Business owners must update and adjust their business plan to reflect changes such as these.”

Whitney L. Sorrell

2. Create your succession plan at the right time

Whitney l. sorrell, jd, cpa, mba, principal attorney, sorrell law firm, plc.

“Business owners should start the succession preferably 5 years or more before they want to retire. Many business owners want to transfer their business to their family members in a way that minimizes the tax cost, holds the business assets in asset protected structures, continues the cash flow to the business owner post succession, and ensures a successful transition of management to the succeeding family members.

“The techniques bringing these benefits have better results over time. Other business owners are selling their business to a third-party buyer. Again, allowing time to prepare the business for sale will reach the highest possible price, and allowing time to properly structure that sale will allow the transaction to incur the smallest legal tax liability and the greatest level of wealth protection upon receipt of the sale price.

Ed Alexander

3. Consider the benefits of succession planning

Ed alexander, esq., founder, alexander abramson, pllc.

“The benefits of succession planning are that you don’t spend 30 years running and building a business only to leave empty-handed. Liquidating and closing up shop—not selling out—will be very unprofitable. The majority of the value of most businesses is in their goodwill and intangibles, not their hard assets.

“As I tell my clients, failing to plan is planning to fail. There have been many times when I’ve spoken to clients after their business sales, and they say to me, “I wish I’d started planning earlier.” They’re happy with the outcome, but they only realize after the fact how much even six months of additional planning could have improved the sale price.”

Bottom Line

While many experts recommend beginning succession planning three to five years ahead of retirement, it is never too early to begin. Knowing how your business will transition, who will take over, and how heirs and partners will be compensated are all keys to reducing future stress in the event of an owner’s sudden departure.

About the Author

Robert Newcomer-Dyer

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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