Creating a succession plan for your business
If you’re looking to sell or pass your business, succession planning is vital. While selling up or retiring may not be on the cards for many small business owners, it’s important to understand how succession planning works, so you can prepare for a time in the not-so-distant future when you might decide to relinquish your business.
A succession plan outlines the process of handing your business operations over to another party while removing yourself as the business owner.
The initial phase of the succession planning process is simple – first you’ll need to decide how will you be exiting your business. You’ll need to ascertain if you’d like to sell your business to an outside party, or pass it on to a family member. Your decision here will impact how hard you negotiate a sales price, the level of legal and business advice you seek, and whether or not you still want to hold a financial stake in the business.
Step 1: Renew your business plan
The first step in succession planning is to reassess your business plan. This plan will be central to the success of your successor, so make sure it’s current.
A solid and up-to-date business plan is essential for your successor to understand a myriad of things including:
- how your business is organised
- what kind of turnover to expect
- what your overheads look like
- how your staff structure works
- any assets involved
- your marketing and sales plans in play
- the current market, including your competitor analysis
- future projections and potential earning capacity threats.
Step 2: Get your books in order
Next, you should look to refresh and fully articulate your set of books. Your successor will need these to understand historical and current compliance details as well as all historical financial data such as net profit, tax rates, sales, and expenses.
Step 3: Write your business succession plan
Now it’s time to put pen to paper and write your succession plan! If you require a template to alleviate the tedium of creating a succession plan from scratch, download the handy template created by business.gov.au. Here’s our top tips for writing your plan:
Nominate your successor
The first fundamental step is to nominate the party that will succeed you to take over the business. In traditional succession planning, that nominee is usually a family member, but it could be an employee, business partner or an external buyer.
It’s vital that this nominee is not only fully aware of what they are getting themselves into but that they possess the requisite skills and experience to succeed. With this in mind, it’s essential that your nominee seeks separate legal and business advice to ensure they have independent guidance as to the ramifications of succession.
Gain a professional valuation
Having a professional valuation of your business is absolutely critical in succession planning. You have no hope of passing on a business that does not come attached to a valuation – especially if it’s an outside buyer.
Now, valuations can shift dramatically in short periods of time, so in your future planning, be prepared to undertake several assessments, with a final one taking place just before you sign an agreement and hand over the business.
Once you’ve written your succession plan, you should update it regularly as circumstances change. New valuations need to be considered and market appraisals may shift. So right up until handover, make sure your plan contains the latest facts and figures.
Step 4: Review your plan with an advisor
After you’ve understood the basic process, the next step is getting professional legal and business advice from a trusted advisor. One key tip is to come to your advisor ready with a basic plan mapped out and an understanding of the plan you’re about to cement.
Step 5: Handover
The final step is the handover and signing of agreements. If you’ve made a solid succession plan, accounting for all contingencies and possibilities, this should be straightforward. You should be able to simply step aside on an agreed date and seamlessly allow the business to be run by your successor.