Business Succession Planning Process for Business Owners

Planning for the future is an important part of building a sustainable business. But while most business owners spend years thinking about how to grow their companies, far fewer spend enough time thinking about how they will eventually leave them.

Your exit may be years away. You may plan to sell the business, transfer it to family members or employees, or transition ownership to a partner. Or an unexpected event could force you to step away sooner than planned.

That is why business succession planning is so important.

A well-developed succession plan helps you:

• Protect the value you have built in the business
• Prepare for a smooth transition of ownership and leadership
• Reduce financial and operational risk
• Provide continuity for employees and customers
• Position the business for a future sale or transfer
• Make sure your exit supports your personal and financial goals

Effective succession planning looks at both sides of the equation: what you need personally and what needs to happen within the business. For small business owners, those two are often closely connected.

Why Business Succession Planning Matters

Many owners assume succession planning is something they can deal with when retirement gets closer. But waiting until you are ready to leave can significantly limit your options.

A business may need several years to prepare for a successful transition. You may need to strengthen the management team, improve profitability, reduce dependence on the owner, document processes, address customer concentration, or make other changes that increase business value.

Succession planning is also about more than retirement.

An unexpected illness, disability, or death can suddenly leave a business without its key decision-maker. Having a plan in place helps ensure the company can continue operating, employees know who is responsible for what, and customers continue to be served.

The sooner you begin planning, the more choices you are likely to have.

Start Your Succession Planning with Your Own Goals in Mind

Before making any decisions about your business, stop and think about what you want your life to look like after it.

Most business owners didn’t start their business just to think about how to cash in a huge asset decades from now. They started businesses to support themselves, provide for their families, and create something they could be proud of.

At some point, though, that business can become a huge part of your overall wealth.

One of the first steps in putting together a good succession plan is figuring out how much money you need to get out of the business to live the way you want to and achieve your long-term financial goals.

That number can have a pretty big impact on when you decide to leave, how you transfer the business, and what you need to do in between.

It’s also worth thinking about things beyond just the money. Ask yourself:

• What would be the perfect time for me to get out of the business?
• Am I looking to fully retire, or do I want to stay on in some capacity?
• What do I really want to be doing with my time when I’m not running the business?
• Is there something I really want to pass on to my family or the next generation?
• Do I want family members or employees to have a chance to take the reins?
• What do I want for my employees and customers after I’m gone?

Sorting out these questions will give you a solid foundation for the rest of your succession planning process.

Understand What Your Business Is Worth

Many business owners have an idea of what they believe their company is worth. Unfortunately, that number may be very different from what a qualified buyer would actually pay.

A professional business valuation or estimate of value gives you a more realistic starting point.

Suppose you determine that you need $3 million after taxes from the eventual sale of your business, but the company is currently worth $2 million. You now have a gap to address.

With enough time, you may be able to increase profitability, strengthen management, diversify revenue, improve systems, or address other factors that make the company more valuable and attractive to potential buyers.

The opposite can also happen. An owner may discover the business is worth considerably more than expected and realize that retirement or another transition could happen sooner.

Either way, knowing the value of your business helps you make better decisions.

Determine Your Financial Requirements

Understanding how much you need from your business requires more than estimating your retirement expenses.

Your financial plan may need to account for:

• Current and future personal expenses
• Retirement income and Social Security
• Healthcare and insurance needs
• Education expenses
• Purchasing or maintaining a second home
• Supporting aging parents
• Estate planning
• Wealth you want to transfer to children or grandchildren
• Charitable giving
• Federal and state taxes
• The costs associated with selling or transferring the business

Taxes deserve particular attention. The selling price of your company is not the amount that ultimately ends up in your pocket.

Your succession team should help you estimate the net proceeds you could receive after taxes, transaction expenses, and other costs. That gives you a much more realistic picture of whether the business can provide the financial resources you need.

Decide How You Want to Exit the Business

Selling your business to an outside buyer is just one way to bring your business to a close.

Depending on what matters most to you and your circumstances, you may think about:

• Selling off your business to a brand new outsider
• Handing over the reins to one of your family members
• Selling to your own employees or management team
• Passing it on to one of your existing business partners
• Bringing in some new investors to join you
• Merging with a whole different company
• Gradually scaling down your ownership stakes but still sticking around
• Or just plain shutting the place down and liquidating assets

Each option of these options has its own set of financial, tax, legal, and operational complexities.

For example, handing your company to a child who works for you every day is a whole different ball game than selling the business to an outside buyer. If you have multiple kids but only one is involved in the business, you’ll need to figure out how to split your assets fairly without jeopardizing the company’s future.

The right way to end your business depends on what you want from the deal and what kind of future you want for it.

Find Out What Needs to Change in the Business

Once you have a clear picture of what you’re trying to achieve, how you plan to exit the business when the time comes, and what your company is worth now, you can see how far off track things are.

At this point, succession planning starts to become a normal part of running your business, not just a one-off fire drill to get you out the door.

You’re likely going to need to work on:

• Making the business more profitable and improving cash flow
• Building in a steady stream of income that you can count on
• Scaling back reliance on just a handful of major customers
• Building a team of rockstar managers who can run the show
• Letting go of some of the daily tasks that currently fall on your shoulders
• Writing down key processes and what needs to happen to keep things running smoothly
• Overhauling your sales and marketing efforts to get more traction
• Sorting out any issues you’ve got with staffing or keeping people on board
• Improving your financial reporting
• Sorting out legal or ownership issues
• Putting good insurance in place and a plan for what happens if someone leaves or dies

A business that can operate smoothly without the owner at the helm is much more attractive to potential buyers.

Get Ready for the Personal Side of Succession

If you are a business owner, you need to think through what happens when the business is gone.

Not only was your company more than a paycheck, it may have defined your life for years, shaping your relationships, social life, and sense of self.

Letting it all go can be tougher than you ever expected.

Before you hand over the reins, you need to ask yourself:

• What am I going to do with myself when the business is no longer dominating my days?
• Do I want to travel, volunteer for something worthwhile, do some consulting, or start something new?
• How involved do I want to stay with the business once the transition is complete?
• How will retirement change things at home, with your partner or family?
• Am I prepared to step aside, let someone else take the wheel, and make the decisions that I once made?

If you think through these kinds of questions ahead of time, it can help the whole process go more smoothly.

Build Your Succession Planning Team

Business succession planning involves financial, legal, tax, operational, and personal considerations. Trying to manage all of them yourself can result in expensive mistakes.

Your advisory team will depend on the complexity of your business and succession strategy, but it may include:

• Business advisor or succession planning consultant
• Financial planner
• CPA or tax advisor
• Business attorney
• Business valuation professional
• CFO or financial consultant
• Business broker or M&A advisor
• Insurance and risk management professional

You may also need specialists in marketing, human resources, financing, real estate, or family business dynamics.

The important thing is that your advisors work together. Decisions made in one area can have significant consequences elsewhere.

For example, the structure of a business sale can affect your taxes, estate plan, and retirement income. A decision to transfer the company to family members can affect both business operations and family relationships.

Succession planning works best when everyone understands the larger picture.

Create a Business Succession Planning Process

When you know what your goals and strategy are, then make a plan to act on them.

A practical business succession planning process should include:

1. Define your personal and financial objectives. When would you ideally like to exit, and what do you need from the business financially?
2. Evaluate the current business. Know its worth, financial results, risks, strengths, and how dependent it is on you, the owner.
3. Select the succession strategy that best fits your needs. Determine if you will sell, transfer ownership internally, or pursue another path.
4. Identify the gaps. Determine what needs to be changed to create the business value you want and prepare the company for transition.
5. Develop future leaders. Find potential successors and give them the experience, authority, and training they need to lead.
6. Handle legal, financial, and tax matters. Put the appropriate agreements, estate planning, insurance, and transaction strategies in place.
7. Create a contingency plan. Determine what happens if illness, disability, death, or some other unforeseen event causes an earlier transition.
8. Set milestones and track progress. Establish clear goals for increasing value and positioning the business for your eventual exit.
9. Review the plan regularly. Revisit your succession strategy as your business, finances, family, and goals evolve.

The process may take years, but that time gives you an important advantage: you can make decisions deliberately rather than being forced to make them by changing circumstances.

Don’t Wait Until You’re Ready to Leave

Business succession planning isn’t a turnkey solution that you create once and put on a shelf.

Your plan should guide important business decisions for years before your eventual exit. Review it regularly with your advisory team and adjust it when your goals, business conditions, or financial situation change.

Most importantly, don’t wait for burnout, health problems, or another unexpected event to start thinking about succession.

The best time to plan your exit is while you still have the time, energy, and flexibility to build the business you need to achieve it.

Whether you hope to sell your company, transfer it to the next generation or simply ensure the business can continue without you, starting early gives you more control over the outcome.

Mosaic Business Advisors can help you evaluate where your business stands today, clarify your succession goals, and develop a strategy for increasing business value and preparing for a successful transition. Contact us to start the conversation about your business succession plan.