Succession planning for small business

If you have started a business and things are running smoothly, then you may want to think about what would happen in the future if you are no longer able (or want!) to work in the business. This is where succession planning comes in – succession planning is considering what happens to your business when you ultimately decide you no longer want to be involved.

Having a succession plan will help reduce the stress and more than likely achieve a better outcome at what traditionally is quite an emotional and difficult time. Planning your leaving will allow you to transition your business to new ownership in a managed and systematic way.

The first step in succession planning is to clarify what you want for the future. Next you will need to define the steps required to turn that ideal into a reality at the same time as taking into consideration your employees and family’s expectations. One thing you shouldn’t do is leave the planning to the last minute as this will more than likely result in you getting less for your business than what you hoped. It is crucial to consider succession planning as an important aspect of your business strategy and is a plan that you will regularly revisit and tweak as your business grows or changes.

Where do you start?

As a starting point, you may want to consider and answer the following questions:

  • Would your business be unable to cope without you and what can you do now to reduce your key person risk?
  • Are you concerned that you won’t recover your investment and the goodwill you have built up when you exit the business?
  • What are your family’s expectations for you and how might these impact your business and your exit from the business?
  • Do you have goals outside of your business that will drive your actions in the timing and the way you exit the business?
  • Have you thought about how much money you will need to support the lifestyle you want after you exit the business?

What are the options?

After you have considered what you want, the next step is to consider the options that you might explore. You could:

  1. Sell to a family member
  2. Sell to an employee
  3. Sell to an un-related party
  4. Sell using a gradual buy-out approach to any one of the three listed above
  5. Close the business down and sell the assets.

The options you can consider will depend on your personal circumstances and the nature of your business but, by considering them early and having a plan to follow, it will mean that you get the best possible outcome for you, the business and the buyer. Some of the issues you may want to consider as part of the succession planning process are:

  • What type of person would be best suited to run the business and where can you find them? You may already have a family or staff member who has shown interest and you even have already identified your successor. If this is the case, then you should start thinking about how you develop their skills so that they can take over when the time is right.
  • Is your business house in order? Make sure you have your systems and processes documented so that anyone coming in after you can run the business without your input. Make sure your bookkeeping and tax affairs are as up to date as possible.
  • Can you improve your profitability? If you are selling to an external party, you may want to talk to your accountant about ways to maximise your profitability leading up to when you might put the business on the market. This may mean making decisions to forgo large tax deductions and increasing your tax liability in the short-term so that you can show potential buyers that you are running a profitable business.
  • Do you need to sell your business at all? Your business may be able to be run without you being involved and you could keep the business as an asset without having to sell it partially or completely. If you think this is a possibility for your business you may want to consider who you would train or mentor as part of your succession plan.
  • When is the right time to start planning? Don’t put off a planning exercise just because you are not ready to sell. Your personal circumstances may change and even if they don’t, it is best to start the process well before you need to sell so that you maximise the value of your business and achieve a better outcome. Your accountant may be able to help you with succession planning along with the tax planning that they already do for your business.

Business owners are no strangers to weighing risk and navigating uncertainty, but having a carefully thought through succession plan in place is one way of reducing the risk. There are legalities and logistics to get through of course but having a succession plan means that you can ensure a smooth transition for you, the buyer and most importantly, your customers.

This article is for general information purposes only and has not been prepared with reference to the circumstances of any particular person.

You should seek your own independent financial, legal and taxation advice before making any decision in relation to the material in this article.