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Exit Plan: How a succession plan can save your business (and protect your family)

Posted: 14 September 2017

While everyone wants their businesses to be successful and operate for a long time, you may not necessarily want to remain at the helm.

At some point, you may want to pass the business on to your children, or to someone else in the company. You may want to sell your share to your business partner. Or you may want to sell the business to another person or company, and retire on the proceeds.

Ideally, you will choose the timing and method of your exit from the business. However, the way life unfolds sometimes, business owners do not always have a choice in what happens, or when.

For example, what would happen if you or your business partner suddenly passed away or became incapacitated?

That’s a stressful enough time for everyone as it is, without having the business (and the financial well-being of the families involved) suffer as a consequence.

To ensure the future of your business, and to cater for loved ones, you need to plan for a range of possible exit scenarios.

This is what’s known a Business Succession Plan.

Every business needs a succession plan, just as every person needs a professionally prepared Will and Estate Plan.

Horror stories happen. Don’t be one of them.

You may not think you need a succession plan. After all, you may have children old enough to take over the reins. Or perhaps you have people in your company who’d love to run the business.

But without a business succession plan, anything could happen.

Imagine this scenario…

A business with two partners or shareholders suddenly experiences the loss of one of the partners in a car accident. Without a succession plan in place, the surviving partner automatically goes into business with the deceased partner’s spouse. They might have had a great relationship on a personal basis, but running a business together and making financial decisions changes the nature of the relationship, instantly. The partners may not agree on the direction of the business, the growth plans for the business, or on how much various people in the business should be paid.

It’s a recipe for conflict.

Or perhaps the surviving spouse wants nothing to do with the business and wants to be bought out of the business as soon as possible.

But what if the surviving business partner does not have the available funds to buy the remaining share in the business, despite being offered a very reasonable price.

They’re stuck. The business–and their stress levels–will suffer.

So, what can you do to avoid such horror stories?

Passing on the baton

So who will be your successor? Will it be someone in your family? A senior employee of your company? Another business owner?

While you may want to “keep it in the family”, it might not be such a good idea with research showing that more than 65% of family businesses fail in the hands of the second generation and another 20% fail when the business passes to the third generation.

Your successor needs two things above anything else: a passion for the business and the skills to run it. And while you can bring them on board early to learn the skills, passion is something you can’t create for them. They either have it or they don’t.

If it turns out someone in your family is passionate about the business, and they have the skills needed to run it (or can learn them), then great. But if that’s not the case, you may be better off handing the baton on to someone else.

Plan early, plan often

So when should you create your business succession plan? According to Craig West, chief executive and president of the Australian chapter of the Exit Planning Institute, you should have started about two years ago.

In an interview with Startup Smart, West says it can take up to two years to get a business ready for sale, and to find the right buyer.

“It takes 18 months to two years to exit successfully. If you do it quicker, you’ll leave money on the table,” he says.

So if you don’t have a succession plan in place for your business, you need to get started now. (If you’re not sure how to get started, get in touch so we can help.)

And like nearly all business documents, a succession plan needs to be kept up-to-date. Families grow and mature, employees come and go, and your plan needs to take all of that into account. There’s no point in planning to appoint a son who’s lost interest in the business, or a senior employee who has since left the business. Review your plan annually.

But first things first… you need to document your Business Succession Plan.

We can guide you in developing an effective succession plan and also ensure you have insurances in place that, for example, can fund the purchase of a deceased or incapacitated partner’s share in a business.

A well thought out and properly funded (insured) Business Succession Plan will make sure the business can continue to operate as smoothly as possible, and conflicts between surviving business partners and spouses, avoided.

You’ve worked hard to build your business. Don’t let it all fall apart once you move on.