you’re planning to sell your business, transfer ownership to an employee or family member, or retire, you need to craft a succession plan. A plan helps streamline your shift out of your enterprise. Poor succession planning can be catastrophic for businesses. Companies that are forced to fire the CEO lose, on average, $1.8 billion worth of shareholder value compared to companies with an effective succession plan. Yet only 35 percent of enterprises have a formal succession planning procedure. Here’s a detailed overview of business succession planning.
Why Do Businesses Need Feasible Succession Plans?
An effective succession plan ensures there is no knowledge gap and allows you to transfer important information instead of leaving with it. With a plan, you’re also assured that a suitable individual will take over your role and uphold your legacy. Finally, an effective succession plan saves resources, money, time, and energy when you decide to transition out and lessens the likelihood of business operations being disrupted due to your exit.
Succession planning is essential if you:
- Have employees: After your exit, someone will need to take the role of administering payroll and human resources, leading employees, and choosing the leadership structure and successor.
- Have complex processes: Once your exit, your successor and employees should clearly understand managing the business processes.
- Have ongoing contracts and repeat clients: After your exit, someone will need to step in to maintain relationships with repeat clients and deliver on ongoing contracts.
- Have identified your successor in mind: You need to consider if they are willing and capable of taking over from you and if you’ve left out more suitable candidates.
How Does a Business Owner Choose a Suitable Successor?
Identifying your successor is vital if your business is to succeed in the long run. You should consider whether your co-owner should take over the enterprise, if you should transfer ownership to your kin, or if you choose to sell your shares to an employee or a larger company. If you choose to sell, you should ensure that your business’s current valuation is accurate so that you sell for a fair price and maximize your payout. To get an accurate valuation, you need details of your physical assets, financial statements, sales information, legal documents, and information about the customer, supplier, and employee. Financial professionals can help you in this process.
What are the Steps for Making a Viable Succession Plan?
- Determine the Timeline: Define when succession will occur, either in case of disability or death or on a set date.
- Choose the Successor: If you aren’t selling to a given party, you should consider choosing at least three candidates, ranking them based on their profile.
- Formalize SOPs (Standard Operating Procedures): Document your SOPs, including the operations manual, organizational chart, employee handbook, and all recurring processes.
- Value Your Business: You should have an up-to-date valuation of your business.
- Finance Your Succession Plan: Define the path through which your successor will fund the purchase of your business. Options include seller financing, loan, and life insurance.
How Eastend Insurance Agency Can Help
Along with choosing an appropriate successor, it is essential to purchase adequate business insurance coverage to shield your organization financially in case of a named peril. Contact us at EastEnd Insurance Agency now to get business insurance coverage that will protect your business interests.