by Nick Mesirow
Business owners who want or need their business to continue on after they’ve ceased to be involved in it should put a succession plan in place. Business succession plans establishes who will run a business after the owner or a co-founder retires or dies and how ownership will be transferred.
Every business owner needs to answer three key questions to provide a basis for their plan:
- What is your timetable? Your age, health, and retirement horizon will dictate the strategies to be selected in your succession plan.
- What is the value of your business? Again, the number of options available to you are driven in part by what your business is currently worth or what it may be worth to future owners.
- What are your retirement needs? Preparation of your succession plan will also be driven by your personal financial needs. If your business is your primary asset, then your succession plan should set out the income you will need to retire by the date of your planned exit.
Once these basic parameters are established, it is time to move on to a legal audit. Although the term is comprised of two words many people try to avoid at all costs, the legal audit is simply a meeting with legal counsel to discuss strategic plans and objectives, review key documents and records, and identify and analyze current and projected legal needs of the company.
Any legal audit should focus on how your current ownership structure will affect the succession strategies available to you. Some ownership structures inhibit or restrict the options that would otherwise be available, while others provide for “creative” solutions to the implementation of the succession plan. Flexibility is a key component to making a succession plan work for all stakeholders.
Finally, it’s important to note that preparing an effective succession plan cannot be done in a vacuum. After seeking input from your advisory team, such as lawyers, accountants, and consultants, you should obtain input and build consensus with the parties targeted to be the next generation of ownership and other affected stakeholders to assure that the succession plan will be well-received and smoothly implemented. The key is to make all affected parties feel as if they were part of the process, which is hard to do if the succession plan is merely presented to them in final form.