Business owners deal with a unique set of challenges. One of these challenges is succession planning. A succession plan is the process of the transfer of ownership, management and interest of a business. When should a business owner have a succession plan? A succession plan is required through the survival, growth and maturity stages of a business. All business owners, partners and shareholders should have a plan in place during these business stages.
This infographic checklist was created as a guideline, highlighting the main points to be addressed when starting to succession plan.
- Determine your objectives - what do you want for you, your family and your business (i.e., business’ financial needs)?
- What are your shares in the business worth (business value)?
- What are your personal financial needs - ongoing income needs, need for capital (ex., pay off debts, capital gains, equitable estate, etc.)?
There are 2 sets of events that can trigger a succession plan: controllable and uncontrollable events.
Sale: Who do you sell the business to?
- Family member
- Outside Party
There are advantages and disadvantages for each - it's important to examine all channels.
Retirement: When do you want to retire?
- What are the financial and psychological needs of the business owner?
- Is there enough money? Is there a need for capital to provide retirement income from redeeming or freezing shares?
- Does this fit into your personal financial/retirement plan? Check tax, timing, corporate structures, finances and family dynamics (if applicable).
Divorce: A disgruntled spouse can obtain a significant interest in the business.
- What portion of business shares are held by the spouse?
- Will the divorced spouse consider selling their shares?
- What if the divorced spouse continues to hold interest in the business without understanding or contributing to the business?
- If you have other partners/shareholders - would they consider working with your divorced spouse?
Illness/Disability: If you were disabled or critically ill, would your business survive?
- Determine ongoing income needs for you, your spouse and family. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?
- Will the ownership interest be retained, liquidated or sold?
- How will the business be affected? Does the business need capital to continue operating or to hire a consultant or executive? Will debts be recalled? Does the business have a savings or insurance program in place to address this?
Death: In the case of your premature death, what would happen to your business?
- Determine your ongoing income needs for your dependents. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?
- Will the ownership interest be retained, liquidated or sold by your estate? Does your will address this? Is your will consistent with your wishes? What about taxes?
- How will the business be affected? Does the business need capital to continue operating or to hire a consultant or executive? Will debts be recalled? How will this affect your employees? Does the business have a savings or insurance program in place to address this?
Execution: Besides having a succession plan, make sure you have an estate plan and buy-sell/shareholders' agreement. A succession plan is complex, we suggest that a business owner has a professional team to help. The team should include:
- Financial Planner/Advisor (CFP)
- Succession Planning Specialist
- Insurance Specialist
- Accountant/Tax Specialist
- Chartered Life Underwriter (CLU)
Contact us about helping you get your succession planning in order so you can gain peace of mind that your business is taken care of.