What is business succession?
Business succession is the process by which a business owner successfully transitions an entity to another owner. In most cases, succeeding a business involves one family member passing down ownership to another family member. While many small business owners choose to keep ownership within the family, there are circumstances where one may find an unrelated successor.
Types of business succession
When most people think of business succession planning, they imagine an owner retiring and passing the business on to their children. While this can be the case, there are other forms of business succession. The two most popular types of business succession include:
One type of business succession involves the transfer of leadership. This can come in a number of different forms but typically will involve a slow transition from one leader to the next. In fact, sometimes the original owner may stay on during the transition to help educate and train the new leader.
This form of business succession can be one of the riskiest because there is no guarantee that the heir will be able to replicate the success of the founder. Moreover, some owners may make subjective decisions about successors if they are looking to maintain passive income.
If you’re in the process of transitioning leadership, it’s important to consider the long-term effects of your decision. A detailed business succession plan can help mitigate some of the pitfalls associated with new leadership and guarantee a steady transition for your successor and your employees.
Selling the business
Many entrepreneurs start a business with the goal to sell the company at a future date. This is a very common type of business succession and is typically a much more direct transition than the previous form.
When selling a business, there is typically a methodical process involved. Your business will receive a valuation, you may be involved in negotiations, and you could have your entire company dissolved. There are so many potential outcomes when selling a business that you must weigh the options before making a decision.
For instance, one of your main competitors may want to purchase your company just for your clients. If you sell your business to this competitor, they may dissolve your entire operations which could mean your employees losing their jobs and your entire business being closed down. Knowing this outcome may make it more difficult for you to go through with the sale.
Whether you’re selling your business or involved in a merger and acquisition, it’s important to have a strategic plan in place to handle the transition.
What is business succession planning?
Simply put, business succession planning is the process of making strategic objectives and goals to help handle the succession of your business. A business succession plan doesn’t need to be a stagnant document. In fact, the succession plan should be a living document that helps business owners handle the process of transitioning their business.
The act of business succession planning is more an exercise than a definitive guide. It’s meant to help business owners start strategically thinking about their future and the future of their company. Some questions that may help to start your business succession plan may include:
- Do you plan to retire?
- If so, when do you want to retire?
- Do you want to open another business?
- Could you see yourself taking on a smaller role at your business?
- What growth trajectory do you see for your businesses future?
- Is there more value in your business now?
As a business owner, it’s important to not get too caught up in your day-to-day. You need to take a long-term approach to managing your business and to managing your work-life balance.
Drafting a succession plan is an important step in the process. Less than 30 percent of small business owners have a tangible business succession plan. Whether you want to sell your business or pass it on to your children, having a document that outlines what that process will entail can make it a much smoother process for you and your successor.
One of the biggest reasons to create a business succession plan is to properly valuate your business. This is particularly helpful when selling the business and ensures that you receive your fair share for equity in your business.
Getting started with business succession planning
If you want to start drafting a business succession plan, you should contact a financial expert. Rivero, Gordimer & Company is a Tampa CPA Firm that specializes in business succession planning. You can contact our CPAs anytime at 813-875-7774.
You can also find additional resources about business succession planning below: