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Succession Planning

Figuring out how to run your small business is one major part of business success, but you also need to know what will happen when you retire. After all, most businessmen want their companies to survive past their own time. After all, having your business survive can help provide income during retirement and a sense of accomplishment, along with income and employment for relatives.

Despite the value of helping your business survive past the first generation, only a small fraction of businesses actually manage to last into a second (let alone third) generation. This is because succession planning can be difficult and many entrepreneurs never set up a formal succession plan, either not giving it any thought or just assuming things will work themselves out naturally. If you follow the necessary steps, you can set up an effective succession plan that will help your business to continue providing service for future generations.

Know Your Options
Before you can actually set up any kind of succession plan, you need to know what options you have for transferring ownership of the company. Think about which options are realistically available to your business. Here are some common possibilities for you to choose from:

  • Selling the business to outsiders.
  • Liquidating the business and selling all its assets.
  • Selling the business to employees individually.
  • Selling the business to employees as part of an ESOP (Employee Stock Ownership Plan).
  • Gifting the business to family members.
  • Selling the business to partners.
  • Selling public stock in the company.
  • Disposing of the business by the estate after death.
Identify Capable Individuals
Once you know what options are available to you, you need to find who the best people would be to take over running the business. Remember that retirement is a process, not an event; having the wrong idea of how retirement will work can doom your succession plans to failure. Even when there are many people involved in the ownership of the firm, you need to identify the individuals who will be the best, most capable decision makers. Particularly, when you plan on continuing the business under the direction of employees or family members, identify the leaders of the company to effect a smooth transition. It must be done smoothly and with the right people.
Perhaps the most difficult part of an effective succession plan, though, is coordinating the transition. It will take time to complete the ownership transfer, and you cannot expect to be in complete control one day and then wash your hands of the business on the next. There must be functioning ownership plans and management plans to help the new leaders. Family members need to prepare to face an estate tax if you keep the business in the family. New owners need to be able to get all the information they need about life insurance policies, voting trusts, buy-sell arrangements, and a multitude of other issues that you’ve been handling while you owned the business. You and your professional advisors need to have all this information accessible and be there to explain things to new ownership. Without effective coordination, a thriving business can still fail and be forced into a distressed sale. But with the proper planning, you can successfully help your business become a lasting institution.
Published: December 21, 2012

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Matt Tarkenton

Matt Tarkenton is Executive Vice President at Tarkenton Companies. He was part of a group that started Renova Partners, a boutique investment bank, and was recognized as a “40 Under 40: Up and Comer” by the Atlanta Business Chronicle in 2009. Matt performs business planning and marketing training for hundreds of professionals across the country, and co-hosts a weekly coaching program on entrepreneurial education. Matt graduated from Princeton University, where he was a member of the 1989 Ivy League Championship Football Team, and received an MBA from Harvard Business School.

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