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Succession planning

At some point, most business owners wish to move on from their business. Succession plans are crafted to allow business owners to leave their businesses smoothly. Some businesses create their succession plans when starting the venture, and others wait until they are actually looking at moving away from their business to begin the process.

Why might a business create a succession plan?

There are many reasons that a business owner may wish to cease their involvement with their business. The most common are:

  • Retirement: when a business owner reaches retirement age, they may choose to sell their business or pass ownership to a family member in order to cease working.
  • Starting a new venture: some business owners tire of their current business or want to leverage their success into a new pursuit. In these instances, they may sell to recoup losses, wrap up their involvement or generate capital for their new venture.
  • Financial motive: businesses can be valued in many ways, but they typically take the potential profits and multiply it by a number of years. This means business owners can generate more money immediately by selling their business rather than by running it.
  • Family motive: in family businesses, the business owner may pass the business to their child or relative in order to move the business to the next generation and continue the business tradition.
  • Financial trouble: if a business is heading towards insolvency or bankruptcy, the owner may choose to close it, sell it or pass ownership to someone else to limit their losses.

Developing a plan

There are no set rules on how to plan a succession, though businesses typically consult with their accountants, lawyers and business coaches before they begin the process. The details which are typically included in a succession plan include:

  • the successor (family member, business partner, other)
  • succession type (partial or full succession)
  • timeframe
  • key personnel changes and skill retention strategies
  • restrictions
  • legal considerations (buy-sell agreement, reference to a will)
  • risk management
  • communication strategy
  • financial considerations (retirement income, sale price, tax implications)

Keeping the business in the family

Family businesses typically make succession plans to move ownership of the business down the generations. To do this successfully, it is important that they consult with lawyers and accountants to ensure that the legal and financial obligations do not harm family relationships.

Buy-sell agreement

A buy-sell agreement is a contract between the owners of a business outlining what will happen if an owner dies or chooses to leave. The agreement will determine:

  • who can buy the departing owner’s share
  • the circumstances that allow that share to be sold (for example, by choice, retirement, death or disability)
  • the price that will be paid for that share of the business

Other options

The other options available to owners when they want to cease their involvement with their business are:

  • selling the business
  • closing the business
  • hiring outside management to run the business

Business owners rely on accountants, financial advisors and lawyers to ensure that they create legally binding and sensible agreements when it comes to moving away from their business.