Exit Strategy: Why a Succession Plan is Important for your Business and your Family


Exit Strategy: Why a Succession Plan is Important for your Business and your Family

You started your business with the intention of making it a success yet your long-term vision most likely does not take into account what will happen to your business when you retire or in the event you should not be able to continue working. While planning for success demands the setting of solid business goals, planning for succession is not high on a business owners list of priorities, but it should be! If you want to ensure all your hard work does not go to waste when you bow out, you need to put a realistic exit strategy in place; one that takes into account various scenarios.

For instance, just imagine what will happen to your business if you or your business partner were to pass away unexpectedly or suffer an incapacitating illness or injury? The last thing the affected parties need is the added stress of deciding who will take charge of the day-to-day running of the business not to mention how it may impact them financially.

Hopefully, the way you exit – and when – are at your discretion. In this case, you will still, however, need to choose a suitable successor. Potentially one of your children or someone who works for you may be a good candidate. Or you might wish to sell your shares to your business partner or to sell your entire business to another person/s or company to supplement your retirement package.

Putting a professional Business Succession Plan in place is all about expecting the best but preparing for the worst. Think of it as the equivalent of a Will and Estate Plan for your business

Don’t let your business become just another statistic

It’s all very well to envisage your children or a dedicated employee enthusiastically taking up the reins when you retire, but life doesn’t always go according to our wishes, no matter how well-meant they are. And without a clear exit strategy in place, you could potentially be putting your business and family's financial well-being at unnecessary risk.

For example, what would happen if you, your business partner (or a majority shareholder) were to pass away suddenly in an accident without leaving a Business Succession Plan in place? In this unfortunate scenario, the remaining partner and/or shareholder would have no choice but to bring the deceased partner’s spouse on board. And while they may get on just great on a personal level there is no guarantee they’re going to see eye-to-eye when it comes to running the business.

This type of “forced” partnership is often fraught with disagreements about finances; employee management; the primary focus of the business; future goals and so on. In short, it’s a recipe for disaster.

It could also be that the spouse has no interest in running the business and wants to sell their shares as soon as possible. Putting the surviving partner in an untenable position if he/she doesn’t have access to the enough funds even if the spouse is willing to sell their shares at a very competitive price. Certainly not a pleasant scenario for all involved.

So how can you avoid your business becoming just another lack-of-succession statistic?

1. Choosing your successor

Before you make a final decision about who is best suited to succeed you, consider that a family member may not be your wisest choice. Sadly, research has shown that more than 65% of family-run businesses fail when they pass to the second generation and further 20% fail in the hands of the third generation.

So what other successor options do you have? Possibly a long-time senior employee? A fellow business owner? It's, without doubt, a tough decision for any business owner to make, but remember there are two vital qualities your successor must have

  • Interest in your business and industry; and
  • The relevant skills.

While expertise can be gained given time and work experience, passion for your business is something your potential successor should possess innately. And it may just be that a family member perfectly fits the successor mould, but if not you will need to come to terms with passing the reins to someone better suited.

2. Start now and keep your exit strategy up-to-date

Many business owners come to talk to us about selling their business when they want to sell it. This is too late. The optimal situation is planning a few years in advance, at least two years if not longer so you can get your business ready for sale.  If you don’t presently have a “Business Succession Plan” in place, you need to make doing so a top priority. And once done, you need to review your Plan annually taking into account any changes in your business landscape that may impact on it. Employees come and go and families grow and mature; there’s no point pinning your hopes on a family member who’s lost interest in the business or an employee who has long since moved on.

So secure the longevity of your business by putting a professional Business Succession Plan in place today. A well-structured and correctly funded (insured) Plan will ensure your business can continue operating as you intended, and help prevent potential unpleasant conflicts between surviving business partners and/or spouses.

If you're not sure how to get started on your Business Succession Plan, contact SMART Business Solutions on 03 5911 7000 or drop us an email on reception@smartbusinesssolutions.com.au.

We’re here to help you develop the most effective exit strategy including ensuring you have the requisite insurances so that you can, for example, fund the purchase of a deceased or incapacitated partner’s share in your business.

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