Succession Planning for Small Business: Securing Your Legacy

Succession planning is a critical aspect that small business owners frequently overlook, despite its immense significance. Succession planning is the process of identifying and preparing future leaders within an organization. We do this to ensure a smooth transition when the current owner or key staff members leave. These departures can occur because of retirement, resignation, or unexpected events.

Neglecting succession planning can have severe financial implications. Without a proper plan, the value of the business may decrease significantly, making it difficult to attract potential buyers or investors. This can lead to the forced sale or closure of the business and unfortunately, we have seen many profitable businesses in Tasmania close for this reason. As a result, the owner may experience financial losses, while employees may face possible job losses.

Another reason for the neglect of succession planning is the emotional attachment that small business owners often have towards their enterprises. Business owners may find it challenging to envision a future without their direct involvement. However, owners should recognise that succession planning is ensuring the long-term sustainability and success of their business. It is not about giving up control.

To overcome these challenges, small business owners should prioritize succession planning and seek professional guidance. They should start by identifying potential successors within the organization and providing them with the necessary training and development opportunities. Additionally, owners should establish a clear timeline for the transition and communicate their intentions to key stakeholders, including employees, customers, and suppliers.

In this blog, we'll discuss why succession planning is important for small businesses and give you practical steps to begin.

Why Succession Planning Matters

1. Business Continuity Management: The unexpected can happen at any time. Do you have recovery plans as part of your risk management plan? What if your business partner suddenly dies or you become ill and are unable to continue? Having a business plan in place ensures that your business can continue to run smoothly, even in your absence.

2. Protecting Your Legacy: As a small business owner, you've worked hard for years to build your company. A good succession plan preserves your legacy and guarantees the continuation of your business values and vision.

3. Smooth Transition: Transitioning leadership can be a challenging process. A succession plan establishes a clear timeline and communicates intentions to key stakeholders, including employees, customers, and suppliers.

4. Having a clear career growth path in your organization can attract and motivate employees, making them loyal and reducing turnover.

5. Financial Security: An effective succession plan can help maximize the financial value of your business. This ensures a comfortable retirement or financial security for your family.

Steps to Create a Succession Plan

1. Add Business Continuity Planning to your Risk Management Plan: By identifying succession planning to your risk management plan, you are giving it the same level of seriousness and thought as other potential threats to the business.

2. Identify Key Roles: Identify the important roles within your organization that would need to be filled in the event of succession. Consider positions such as CEO, Finance Officer or any specialized roles unique to your business.

3. Assess Potential Successors: Look at the talent pool within your organization. Who have the skills, knowledge, and leadership qualities required for the roles you've identified. It's essential to groom and develop these individuals for future leadership positions.

4. Define the Timeline: Establish a timeline for the transition. Determine when you plan to step down or reduce your involvement in the business. A longer transition period typically allows for a smoother handover.

5. Talent Management: Develop training and development plans and work with your potential successors to create individualized training and development plans. This might include mentoring, leadership training, or job rotations to prepare them for their new roles.

6. Communication is Key: Keep your employees, family members, and stakeholders informed about the succession plan. Transparent communication can alleviate concerns and resistance.

7. Legal and Financial Considerations: Talk with legal and financial professionals to discuss tax implications, estate planning, and any legal documents. This may include buy-sell agreements, that may be necessary for the succession plan. Speak to a finance broker who can guide you and your successors on the financial choices for funding your succession plan.

7. Test the Plan: Conduct a trial run of the succession plan to ensure that it works smoothly. This can help identify any potential issues and allow you to make adjustments as needed.

8. Monitor and Adjust: As your business and circumstances change, periodically review and update your succession plan to ensure it remains relevant and effective.

Planning for Success

When talking to business owners in their 40’s, we will often ask them “what is your end game or long-term plan? Where do you want to be in 10 or 15 years?” Generally, it isn’t something they have considered. An exit or succession plan can take a long time to put in motion and we can help with that.

Recently, our CEO, Lance Cure ran an information session for small business owners and spoke about business acquisition finance and succession planning. He talked about a client who owned a farm and had three children. The client had identified one child who he felt would be best to take over the farm but was concerned about the other two children.

Lance and the client worked on a long-term structure. Which included borrowing against the farm to set the other two children up. All three children understood that one son was going to get the farm, but the equity opened up in the farm was used to sponsor the other two children’s education in their area of interest. This long-term succession planning allowed the farm to remain in the family for another generation.

As you can see, succession planning can be very long term and waiting until you are ready to retire may be too late.

Funding your Succession Plan

Business acquisition or finance for succession planning can be a specialised area. Many of the big banks these days specialise in bigger debt clients and don’t have the products or skills to assist with smaller business. Often a bank will tell you that if you don’t have bricks and mortar as security, you can’t borrow to get into a business.

We work with lenders you may never have heard of who will give you a percentage of the purchase price for:

• Goodwill
• Franchises
• Renewable income such as finance brokers or insurance brokers
• Leasehold/Freehold
• Stock

At Finance Brokers Tasmania, we have been looking at company’s financial statements for over 37 years and recognise that no two are ever the same. Through looking at the statements, we can generally work out the cash flow and how long it would take to pay back a loan without putting the business under financial duress.

Conclusion

It is important to remember that succession planning is a process and is more than retirement preparation. It's about protecting your business, its values, and its future.

Identify and develop future leaders, through career development, in your organization to ensure a smooth transition when needed. A good succession plan is important for the future success of your business and preserving your legacy. It helps you hand over your business to family or develop internal talent for leadership.

Start planning today to secure your business's future tomorrow.