The old adage, “Fail to plan and you will plan to fail”, is very relevant and true when it comes to business. Implementing a succession plan will ensure your business continues to thrive when you leave.
Most business owners dedicate years of hard work to making their business a success. But what happens if they are suddenly unable to turn up to work anymore or it has come time for retirement? What will happen to your business then?
It’s not really a pleasant thing to think about so we tend not to, much like people shying away from making or updating a will. But the last thing you want is for those years of hard work to come to a grinding halt because you did not think to implement a business succession plan.
What is business succession planning?
Business succession planning refers to assessing, devising and implementing “exit strategies” for the business owner or owners. This can be for an unexpected need for a new owner – such as in the case of death, disability or significant trauma – or it can also be in relation to planning for the future, such as the business owner/s going into retirement, passing the business on to a family member or selling it to a completely unrelated party.
When implemented correctly, a business succession plan can assist you in addressing the issues of when and how the changes to new ownership and management will occur. It also gives your business an improved chance of survival when the transition to new ownership or management takes place.
Benefits of succession planning
The benefits of business succession planning depend on the precise personal circumstances of each case, but they can include:
• Preserving and generating family wealth – including protection from creditors, spendthrift family members and estranged or divorced spouses.
• Minimising disharmony between family members – particularly if they have different views about what should become of the family’s assets.
• Minimising the impact of tax.
• Funding retirement.
• Risk minimisation and mitigation.
Key Person Insurance
It is important to differentiate between business succession planning and “key person insurance” – two concepts that are often confused. Business succession planning is generally concerned with the more logistical and day-to-day implications to the business should the owner not be around. This includes considering who will manage the operations and/or be the new owner, and how the succession might impact on the spouse or beneficiary of the exiting party. Essentially a risk management strategy, business succession planning should also involve any other entities that are operated, managed or owned by you or your business.
Key Person Insurance exists to protect the business against risks that it may be exposed to should the “key person” (or persons) suddenly exit the business. A key person in this context is considered to be a business owner, principal, manager or sales executive. These people are valuable in the business as they generate income and profit and they may generate capital cost for re-training or replacement. Key Person Insurance is concerned with the direct and immediate effects to the financial state of the business such as revenue and profit. It considers, and seeks to formulate answers to questions such as; if the key person is no longer around what would be the effect on revenue and profit? Would the business be able to continue trading? Could it pay the necessary bills and other costs?
It is extremely important to have plans in place that will protect not only your lifestyle interests and needs but also your intentions for your business. It is never too early to start planning for the future, so put together a succession plan now.
Do you have a succession plan in place for your business? Have you had experience with succession planning and, if so, do you have any tips?
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For more from Michael Quinn, head to www.flyingsolo.com.au, Australia's community for solo and micro business owners.