Business succession planning is much more than nominating a successor to take the reins when you step away from the business. A succession plan is like the operating manual, guidebook or even philosophy of the business. By not considering your exit plan early, often means you become the most valuable asset of your business. Making the sale of your business difficult, or at the very least undervalued.
“Power comes not from knowledge kept but from knowledge shared”.
― Bill Gates
Only 19 per cent of Australian small businesses have a business succession plan. Also, 25 per cent of businesses that are looking sell do so without a succession plan in place. And, for those businesses who have begun a succession plan, many leave it too late. The absence of a succession plan can make finding a new owner all that more difficult. Yet, selling your business is not the only benefit a succession plan will bring.
What is a business succession plan?
A business succession plan outlines everything that is needed to run the business in the absence of the owner. The succession plan should come into effect when you retire, sell, are injured or sadly, die. It should have all provisions in place to protect and provide for those that are dependent on the business for their own livelihood. This includes your family, your employees and also investors. It is best practice to think about a succession plan when the business is first setup.
Benefits of a Business Succession Plan
If you have been reluctant to start or even think about a business succession plan, consider these benefits, even if you’re not looking to step away any time soon:
1. Passive Income potential
The less reliant your business is on you for the day to day, the more time you will have for yourself. Having a business hum along without you provides more time to think clearly and plot the future direction of the business, or a new business venture entirely. If you are nearing retirement, it may allow for more leisure time while still drawing an income from the business prior to selling.
2. Employee engagement
Staff that see themselves as future owners, or have a vested interest, are likely to be more engaged and eager for the business to succeed. By nominating these chosen lieutenants early, and giving them the knowledge to run the business, provides certainty on what the future holds. This means there is more confidence on their opportunities within the business and even potential future buyers of the business. It can also be a basis for training and development opportunities so staff build the right skills to lead before they are called upon to do so..
3. Business Valuation
Having a business succession plan always positions the business as an asset. It ensures you can clearly present the business on financial terms. It makes it clear that if you are no longer with the business that the business operations will not be disrupted. It is very common for a business to be so dependent on the owner making the value of the business less should the owner no longer be involved in the operations.
4. Insurance policy
You can’t plan disasters, but you can plan for when disasters strike. If something happened to you as a business owner and you were no longer able to work, how would your business survive? How are you, your family and your employees kept financially secure? While business insurance policies like key person insurance may be included, a business succession plan is more comprehensive to plot all possible disaster scenarios and build the corresponding fail safes to put into action when needed.
Business succession planning is worth thinking about from the moment you begin your business. It will help make decisions along the way that setup the business for both success and succession. It removes the dependency on you for the business to succeed, motivates staff to emerge as future leaders and can provide a passive income for you in future years when you wish to explore new ideas, opportunities and interests.
Saige Accountants and Financial Planners can help establish a business succession plan for your business. We can start building the taxation, legal and regulatory framework so your business is structured correctly from the very beginning. Even if you don’t intend on things changing for some time, you will have peace of mind that should things change quickly you have a plan on hand to execute quickly.