Knowing what you want to happen with your business after you leave is a great first step. However, there are several challenges to creating a robust business succession plan that many entrepreneurs fail to consider until the moment of transition.
Challenge 1: Capturing Institutional Knowledge
You have been the head of your company for years, maybe even decades. You know everything from where the soap is stored to when the last time your bank accounts were audited. (Or at least, you know where to look it up.)
If you have chosen your successors wisely and have brought them into the leadership early, they probably know a great deal about how the day-to-day business is run, and about how to make some of the key decisions. However, there will always be details of institutional knowledge that leave when you do.
Capturing that institutional knowledge is one of the biggest challenges to creating a robust business succession plan. If you have the luxury to simply retire, your successors will most likely be able to reach out to you when one of those details becomes relevant. A more sudden transition, such as if you become ill or pass away unexpectedly, could leave your replacements scrambling for more details.
The best solution to this challenge is to begin recording that institutional knowledge. You may want to hire someone to write the history of your company, or create a transition manual that goes through the various details of running your business. That way, when you ride off into the sunset your successors aren’t left without the important details they need to keep your company running smoothly.
Challenge 2: Valuing Your Business
How much is your company worth? Owners of small businesses have vastly different opinions of the value of their company. Some see it only as an accumulation of things:
- Bank accounts
- Accounts receivable
This can cause them to significantly undervalue corporate intangibles such as goodwill or company contacts. Other business owners overestimate the company’s value. They may rely too heavily on the work put into growing the company, or overvalue expensive equipment that has depreciated over time.
This can create a challenge to your business succession plan. Except in cases where one person assumes a retiring executive’s entire share of the company, you will need to establish the true value of your business before dividing that asset among your succeeding shareholders.
A proper business valuation can cost thousands of dollars, but it is essential to a robust business succession plan. A certified business valuator will measure everything from inventory to reputation and prepare a documented estimate of the true value of the business. Even in single-inheritance cases, the recipient of the shares needs to know what they are getting for tax purposes, and to see if they can afford to step into the role.
Challenge 3: Funding The Business Succession Buyout
Unless you plan to work in or own your business until you die, eventually your successor will need to buy you out. You will likely want to use the money from your company to fund your retirement, cover medical expenses, or allow you to travel in ways you couldn’t while working as an entrepreneur.
This is why you need to establish the value of your business, and your share of the company, early in your planning process. Your successors will need to make their own financial plans, so everyone knows they will be able to buy you out when the time comes.
Even if your business succession plan does come into effect because of your death, your succession plan may require the shareholders to pay the estate for the value of your shares. In these cases, your successors may not have the same chance to proactively prepare for the transition. A life insurance policy purchased on each partner can ensure that the remaining shareholders, including your intended successor, have the funds to pay your estate and distribute your shares according to the plan.
Having a robust business succession plan is an essential first step to transitioning your business. However, unless you rise to these challenges, the plan you have today may not be realistic when the time for retirement and transition comes.
The Cronin Law Firm has experienced attorneys to aid with whatever legal issue you’re facing. If you are planning for your company’s future or to protect your family business after you are gone, contact The Cronin Law Firm today to schedule a consultation.