Succession planning is a crucial yet often overlooked aspect of running a business. As a small business owner, you’ve invested countless hours, energy, and resources into building your enterprise. But what happens to everything you’ve built when it’s time for you to move on?
Whether you’re planning to retire, sell your business, or pass it on to the next generation, proactive planning is vital to protect your legacy and secure your personal financial future. Here’s what you need to know to get started.
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Why is Succession Planning Important?
Succession planning goes beyond determining who will take the reins of your business. It’s about crafting a roadmap that ensures a seamless transition of leadership and ownership while addressing your own personal and financial goals that are tied to the business. Without a solid plan, you risk organizational instability, revenue losses, and even the dissolution of your business.
A well-designed succession plan also provides clarity to your employees and stakeholders, minimizing disruptions during the transition. It ensures your business remains competitive and stable, even during leadership changes.
Proper planning can also help you maximize the value of your business, as buyers or successors are more likely to invest in a company with a structured and secure future.
The 6 Essential Steps in Succession Planning
1) Define Your Goals and Objectives
Before you start drafting your succession plan, it’s important to reflect on your personal and professional goals. Ask yourself:
- Do you want to pass the business to family members or sell it to an external buyer?
- What role, if any, do you envision for yourself after the transition?
- How will the sale or transfer of your business contribute to your retirement plans?
By clearly defining your objectives, you can create a plan that aligns with your vision for the future.
2) Valuate Your Business
To create an effective succession plan, understanding the value of your business is critical. Having an accurate valuation gives you insight into how much your company is worth and what potential buyers or future owners might be willing to pay. A professional financial planner or business appraiser can help you determine your business’s true value by analyzing factors like revenue, assets, liabilities, and market trends.
3) Choose a Successor
Selecting the right successor is one of the most crucial aspects of succession planning. This decision will vary depending on your objectives:
- Family Succession: If your goal is to pass the business to a family member, ensure they have the skills, interest, and commitment to lead effectively. You may also need to address potential conflicts among family members.
- Internal Leadership: Grooming an existing employee or team within your organization ensures leadership continuity while maintaining company culture and values.
- External Sale: Selling your business to an outside party, such as another entrepreneur or a private equity firm, may be the best option if you’re looking to maximize financial gain.
4) Build a Succession Timeline
Transitions don’t happen overnight. Creating a realistic timeline is important to help ensure a smooth process. For instance, if your plan involves training a family member or internal team leader, consider a phased handover that allows for mentoring and skills development. If you’re selling the business, take time to identify buyers, negotiate terms, and finalize agreements.
5) Develop a Financial Strategy
A successful succession plan must account for your personal financial needs and those of the business. This could include provisions for retirement income, tax planning, and cash flow management. Collaborating with a CERTIFIED FINANCIAL PLANNER ® professional ensures that your wealth and investments are optimized for both the transition process and your future goals.
6) Communicate Your Plan
Transparency is key when it comes to succession planning. Once your plan is in place, communicate it clearly to relevant stakeholders, including employees, family members, and business partners. This helps build trust and ensures everyone is aligned with the long-term vision for the company.
The Role of a Financial Planner in Succession Planning
Succession planning involves navigating complex financial, legal, and emotional challenges. This is where a financial planner can add significant value. Here’s how partnering with a financial planner can help:
Holistic and Tailored Financial Guidance
Every business owner’s situation is unique. A financial planner can assess your current financial standing, identify opportunities to potentially grow your wealth, and create a customized plan that supports your succession goals. By understanding both your business and personal finances, a planner helps ensure that your financial strategies are holistic and well-integrated.
Retirement Preparedness
For many business owners, the sale or transfer of their company is a key component of their retirement plan. A financial planner can help you determine how the proceeds from your business transfer will support your retirement lifestyle. They’ll also factor in potential risks, such as market volatility or unexpected expenses, to create a sustainable retirement income plan.
Tax Planning
One of the most critical aspects of succession planning is tax efficiency. Transferring or selling a business can trigger significant tax liabilities if not handled correctly. Your financial planner should work alongside your tax advisor to help minimize your tax burdens, whether through trust structures, gifting strategies, or proper timing of transactions.
Risk Mitigation
Unforeseen events such as illness, death, or market downturns can derail even the best succession plans. Financial planners help mitigate these risks by establishing contingency plans, such as insurance policies or buy-sell agreements, to help safeguard your business and personal assets. (Read our article, , if you’re new to this type of tool.)
Emotional Support and Objectivity
Succession planning often involves deeply personal decisions, especially when family dynamics are in play. A financial planner provides objective advice to help you make rational decisions that can benefit both your business and your loved ones. Having a trusted advisor to guide you through emotional and difficult conversations can significantly reduce stress during the process.
Common Challenges in Succession Planning
It’s important to acknowledge the potential obstacles that may arise during succession planning. These include:
- Procrastination: Many business owners delay succession planning because it involves confronting difficult topics, such as letting go of control or planning for unforeseen circumstances.
- Family Disputes: When passing a business to family members, disagreements can arise, particularly if roles, responsibilities, and ownership shares are unclear.
- Underestimating Financial Complexity: Valuing the business, handling taxes, and creating a retirement plan involve intricate financial considerations that often require professional guidance.
Overcoming these challenges can be much easier with the support of a financial advisor who understands the intricacies of succession planning.
The Best Time to Start Planning… is Now
Succession planning is not a one-size-fits-all approach. It’s a personalized, dynamic process that evolves as your business and personal circumstances change. The earlier you start, the more flexibility you have to address challenges, prepare for contingencies, and maximize your options.
At Advent Partners, our CERTIFIED FINANCIAL PLANNER® professionals specialize in helping small business owners like you build smart, personalized succession plans that are designed to secure your legacy, protect your business, and support your personal financial goals.
If you’re ready to take the next step, reach out today to schedule a consultation. Your future—and your business’s future—are too important to leave to chance.
Plus! Don’t Miss Our FREE Succession Planning Checklist An easy-to-use starter guide to building the exit strategy that’s right for you. |
DISCLAIMER
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
Thrivent Advisor Network, LLC and its advisors do not provide legal, accounting or tax advice. Consult your attorney and or tax professional regarding these situations.
