Succession Planning: Preparing Your Business for What Comes Next

Key Takeaways: 

• Start succession planning years before a transition, so you have more options and more time to address weaknesses. 

• A business valuation gives you an objective view of what your company is worth and which factors affect that value. 

• The structure of a transition affects taxes for both the owner and the successor, so bring in your CPA, attorney, and financial advisor early. 

For many small business owners, succession planning is something they know they should think about, but it often gets pushed down the list of priorities. When you are focused on running the business today, it can be difficult to spend time planning for a transition that may be years away. 

But succession planning isn’t just about retirement. It is the process of making sure the business is prepared for whatever comes next, whether that means transferring ownership to a family member, selling to employees, bringing in a business partner, or selling to an outside buyer. 

The earlier you begin planning, the more options you are likely to have. 

 When Should You Start Succession Planning? 

The best time to start is years before you expect a transition. One of the biggest mistakes business owners can make is waiting until a transition is imminent before beginning the planning process. 

A successful transition can take years to prepare for. Ownership structure, management responsibilities, financial performance, taxes, estate planning, and the future role of the owner may all need to be considered. 

Starting early gives you time to identify potential challenges and make changes gradually rather than being forced to make major decisions under pressure. 

Identify Who Will Take Over 

A key part of succession planning is determining who could eventually take ownership or leadership of the business. 

For a family-owned business, that might mean identifying and developing the next generation. For other businesses, the right successor could be a key employee, management team, business partner, or outside buyer. 

The important question is not simply who wants the business. It is whether the potential successor has the skills, experience, resources, and desire to successfully lead it. 

Developing future leaders well before a transition can also make the eventual change smoother for employees, customers, and other stakeholders. 

 How Do You Know What Your Business Is Worth? 

A business valuation gives you an objective measure of what your company is worth. Business owners often have a general idea of what their company is worth, but succession planning requires a more objective understanding of value. 

A business valuation can provide an important starting point for determining whether the owner’s financial goals are realistic and what a potential transition might look like. 

A valuation can also help identify factors that may affect the value of the business, including: 

• Customer concentration 

• Reliance on the owner 

• Management depth 

• Profitability 

• Recurring revenue 

• The quality of financial information 

Understanding these issues early gives owners time to address weaknesses and potentially increase the value of the business before a transition. 

Payne Nickles can assist business owners with valuations and help them better understand the factors that contribute to the value of their business. 

How Does the Structure of a Transition Affect Taxes? 

The structure of a business transition can have significant financial and tax consequences for both the owner and the successor. 

A sale to a third party, transfer to family members, employee ownership, and other transition strategies can each have different implications. 

Succession planning should therefore involve more than simply deciding who will own the business. Working with your CPA, attorney, financial advisor, and other trusted professionals can help you evaluate the available options and understand the consequences before a transaction takes place. 

Make the Business Less Dependent on the Owner 

A business that depends heavily on its owner can be difficult to transfer. 

If the owner is responsible for most customer relationships, makes nearly every important decision, or is the only person who understands critical processes, a transition can create significant risk. 

Building a strong management team, documenting important processes, developing customer and vendor relationships throughout the organization, and delegating responsibilities can make the business more transferable, and often make it stronger in the process. 

The Bottom Line 

Succession planning is not simply about deciding who will own the business someday. It is about preparing the business and its people for a successful transition. 

Starting early gives business owners more choices, more time to address weaknesses, and greater flexibility to structure a transition that meets their personal and financial goals. 

Your Payne Nickles advisor can help you evaluate the financial and tax considerations of your succession plan, assist with business valuations, and work with your other advisors to help you prepare for what comes next. When you are ready to start planning, reach out to start the conversation.