If you own a small business, you know the importance of a well-written plan. From business plans to marketing and financial strategies, these documents are your roadmap to building a successful business. One type of plan that is overlooked by more than half of Australian small business owners is succession planning. Let’s break it down so you understand how it will help you.
What is a succession plan?
A succession plan defines the steps your business will take when you’re no longer in charge. Also known as a business exit strategy, this crucial tool prepares for the day you hand over your business to someone else. This type of plan allows you to protect your business and its future when you’re ready to retire, or if you unexpectedly need to step down.
Who needs succession planning?
Ideally, every business does. Some plans will be more complex than others, but going through the process is good business practice. Creating a roadmap will protect your wealth and the company’s future when you have:
- Employees to consider
- Assets to sell
- Debts to pay
- Family members involved in the business
If you have business interests that prevent you from closing the doors, a succession plan will make sure they stay open.
Why is succession planning necessary?
A succession plan helps you protect what you’ve worked hard to build. By going through the steps, you’ll understand the value of your business and how to pass it on successfully.
As the owner, a succession plan will not only protect your legacy but more importantly, it will maximise personal wealth for retirement.
If you own a family business, a succession plan allows for a smoother transition with fewer family disputes. Making sure your wishes and those of your family members are aligned is an important outcome — similar to having a will in place.
Why do small business owners overlook this plan?
Owning a small business is personal. A lot of blood, sweat and tears go into building a business. Thinking about how it will end is difficult and emotional for many owners.
For others, the long hours involved in running their business leaves little time to think about the future. Most small business owners don’t understand the consequences until they retire and it’s too late.
When should you start succession planning?
Like any plan, the earlier you start, the better.
You should begin the succession planning process at least three to five years before you want to exit the business or retire.
Creating a plan early will not only help you smoothly transition into retirement. It also will serve as a safety net if you fall ill unexpectedly.
What are your exit options?
Your options depend on the size of your business and if you have employees and inventory to consider.
For larger companies, your options include:
- Selling your business to an outside buyer
- Passing the business on to a family member
- Selling the company to an employee
A solopreneur or freelance professional has the option to tell clients the business is closing, take care of any outstanding debts and turn out the lights.
What are the benefits of going through the steps early?
A large part of succession planning is learning what your company is worth.
When you know the monetary value of your business, you can make smarter decisions and earn top dollar if you decide to sell.
What does a succession plan include?
There are four essential elements to a succession plan:
- Title page. Here you’ll include necessary company information such as your ABN and contact details.
- Succession section. The main section that includes your organisational structure and legal considerations.
- Finance section. All the relevant information about your business including market value, retirement income and taxation.
- Supporting documents. Attachments such as insurance papers, contracts and agreements.
Where can you go for help?
The first step is to educate yourself as you’re doing now. Take a moment to explore the Australian Government website where you’ll find a succession plan guide and other helpful tools and templates specifically created for small business owners.
Talk to the professionals you engage to support your business affairs, such as your banker, accountant, or financial or business advisor. Ask if they have expertise in succession planning. They will take you through the steps and ask the right questions for your situation.
Keeping everyone informed will result in a smooth transition.
You’re already one step ahead
If this is the first time you’ve read about needing a succession plan, don’t worry. You’re further ahead than most small business owners. Simply thinking about the day you’re ready to retire and how you’ll hand over your business is a step in the right direction.
Continue to gather information, talk to other business owners and your accountant to customise your plan. Your foresight will protect your employees, wealth and legacy.