What will happen to your business if you die or become incapacitated? This is one question which many business owners don’t think about or feel uncomfortably thinking about but with the consistent risks, we face each day it may be time to consider a succession plan for your business. Another reason why it is important to think about a succession plan is that it will ensure that you run your business as a saleable business so that when you do decide to retire you will get the return from the business you were hoping for. Here are four steps to creating a succession plan.
STEP 1: Decide who will be your successor
Depending on how your business is set up there are four groups of people who you could choose from to take over your company.
- A family member: This is normally the first choice for a business owner, especially if it is a family-run business, but you do need to consider whether the family member would want to take up the position from you. If they do, then you need to think about the problems which may occur if this family member takes over the reins. You may also want to decide on how disputes may be resolved.
- A business partner: If you pass away or retire, your business partners may choose to buy your share.
- An employee: Is there someone in your employ who you believe would fit the bill to own and run your business? If so, you should discuss the matter with them and see if they would like to take the reins from you.
- An external buyer: This is someone outside of the company who may be interested in purchasing your business.
STEP 2: Get a business valuation
Next, you need to know how much your business is worth. By doing a business valuation, you will know how much money you will potentially have to retire on, you can ensure a fair price is paid for your share in the business, and you can ensure you purchase the correct amount of insurance to protect your business.
STEP 3: Develop a training programme for your successor
You have been running your business for many years and a lot of what you do is in your head. You need to make a note of the critical functions of your company and then train your successor in these areas. You should let them work in each section and allow them to make mistakes. Another item to consider is creating process documents for each area of your business so that successors know how things have been done should you not be around to tell them about it.
STEP 4: Create an agreement
It is important to get the lawyers involved to create an agreement about how your succession will take place. They will draw up a buy-sell agreement which will become effective should you retire, divorce or pass away.
By following these four steps you will be well on your way to creating a successful succession plan for your business.
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