Do you have a plan in place, just in case? If not, your legacy may only last as long as you do.
Whether you own a restaurant or have just launched a new tech startup company, succession planning is the key to longevity.
We often have long-term and short-term goals for our business, which is so important. It keeps us on track and headed in the right direction - but what about succession planning?
The U.S. Trust recently released a survey about Wealth and Worth where they sampled groups of multi-million dollar business owners. Two-thirds of business owners interviewed said they really hadn’t thought about who would take over their company in the event of their death, long-term illness or retirement.
The report stated that, "A large number of business owners have not articulated a strategy for ensuring the highest possible valuation of the business or its continuity beyond the current owner".
Bad things happen to good people
Humans tend to believe that bad things will never happen to them but they often do. One legal website says that less than 30 percent of all business owners have a solid succession plan in place. No one wants to think about dying, but the reality is that, eventually, it'll happen to us all, and not necessarily when you'd expect. Approximately 150,000 people die each day across our planet.
Once you see the issue in that perspective, you’ll realize that this is something important and you need to plan for it. If you die or just retire without a good succession plan, then your business could be in trouble. In a Sole Proprietorship, once the owner dies, the business dies as well. The business owner’s executor will liquidate all assets, then pay off all outstanding debts. In some cases, there isn’t much left for the heirs to inherit.
Leaving your family financially set
Scenarios like this cause great stress for family members, not to mention chaos for employees. One day, you have an amazing job working for someone you respect and the next day the business is closing its doors and selling all the assets. In this modern age, it's completely unnecessary for things like this to occur.
Today, business owners are thinking more and more about exit strategies. You may want to retire at some point or sell your business and use the profits for a new start-up. Innovative technological advancements open the doors every day for amazing new businesses to be created. A good plan of succession can help you sell the business and reap the highest profits.
So, what should your main concerns be when creating a succession plan? How can you ensure that your business will continue to thrive even without you at the helm? Consider these top five Best Practices for strategic succession planning.
Best Practice One: Your Business Goals
The first and most important step is to sit down with your spouse and talk about your long-term goals for the company. Do you want to keep the business in your family? If you have family members who can run the business, then this is a real possibility. On the other hand, if your surviving family members live in other states or have their own business to run, it might not be the best idea. Each situation is different and requires a unique approach.
Best Practice Two: Engage an Attorney
Now that you know what is best for your business and your family, should anything happen to you, it’s time to speak with an attorney. Start by explaining your business and family situation. Maybe you have children who wouldn't be able to take over your business until they're older. In that case, your estate will need an executor. Your spouse and/or children should not have to suffer or be placed in tenuous situations. Outline your wishes with legal documents that make it clear what should happen next if you die or become incapacitated and unable to run the business yourself.
Making smart choices One the biggest obstacles to this process is that people tend to make emotional decisions that might not be ideal for the business. Ask a good friend, hire a consultant or whatever you need to do to get honest feedback. Ask your lawyer what he thinks. Attorneys have so much experience in areas where the average person knows nothing. Before finalizing anything, be sure to talk to trusted friends about your choices and make sure they agree with what you’re about to do. Don’t forget that you can go back and alter the agreement if circumstances change in your life. This should always be done whenever there's a divorce or some other life-changing event.
Best Practice 3: Choosing the Right Business Structure
All entrepreneurs will tell you that selecting the right business structure has so much to do with your success or failure. Depending upon your business type, certain business structures offer more flexibility, lower tax rates, and limited liability exposure. The most common types of business structure are:
Sole proprietorship - Certainly the simplest method of doing business, but also the one with the highest tax rates. The self-employment tax on net income is typically higher than other rates. In addition, a sole proprietor is risking the loss of personal and business assets if some type of lawsuit is ever filed.
Partnership - Owned by two or more people. There are several types of partnerships. This entity offers unlimited liability to each partner for any debts incurred by the business.
Limited Liability Company (LLC) - This entity offers personal protection from any lawsuits filed against the company. It also provides the ability to create a brand name and business name that you can build marketing campaigns around. It clearly defines the relationships of the partners in the business. One of the biggest drawbacks are the high self-employment taxes assessed on ordinary net income.
Best Practice Four: Mentoring Employees
When you've found the business structure that's right for your situation, you can begin to build around that. Great leaders can identify and mentor employees with strong potential. Your business goals should always include choosing a successor to carry on your legacy if that is important to you - you can't leave it to chance.
During your business life, you’ll hire people who seem to have values similar to your own. Keep an eye out for those people. When you find someone with similar work and personal philosophies, spend some time developing their skills. Big companies like IBM and Microsoft have programs to mentor people who really want to go all the way with the company. These industry giants understand the importance of highly trained employees who want the company to succeed. Great employees should be the backbone of every small and large business.
Best Practice Five: Motivating Top Talent to Help You Succeed
A good plan of succession identifies and rewards top talent. But it also accomplishes something else that's much more valuable - it better outlines your company's relationship with its employees, which helps to increase their motivation and drive. When your employees realize that you value their input and care about developing future leaders, they simply work harder for you. Recruit the right people and then help them develop their skills so they can move into more challenging roles. Reward workers who are doing an exemplary job.
Get the most out of your business Strong business discernment is a key factor in building a sustainable business that will live on whether you pass away or just sell out and buy an island in the Pacific Ocean.
The stronger your business is, the more profitable. Additionally, you'll have the peace of mind knowing that your family and your employees will not suffer if some unforeseen tragedy occurs.