The Importance of Business Succession Planning

ByJulija A.
March 21,2022

Business planning is an essential part of success, but people often forget that it doesn’t end once your enterprise starts doing well. It can be easy to forget about a succession plan when your business is thriving, but it’s in your best interest not to.  In this guide, we’ll talk about all the benefits of such a plan and present a checklist that will guide you through the process of business succession planning.

What’s a Business Succession Plan?

A business succession plan is a step-by-step set of instructions on procedures and processes detailing how your business will continue to function if an entrepreneur, business owner, or even a key employee leaves. 

It answers questions like who will take over the affairs of the business, how long this succession will take, and which operating processes and procedures will be maintained or changed.

Business owners can create a business succession plan in a number of ways, including engaging the professional services of someone who handles these types of events exclusively.

Who Should Create a Succession Plan?

Entrepreneurs or business owners should always do succession planning for their businesses. A succession plan is mainly considered in the context of a business being sold or the owner retiring. Still, there are other scenarios where a company succession plan can be useful, such as in the event of sickness or untimely death. In a way, you can think of this plan as a sort of a testament for a business, ensuring its best interests are carried out, regardless of what happens.

When Should You Create a Succession Plan?

Just as creating a will is dependent on several factors, making a succession plan needs to consider various business factors, so you can’t rush its creation. That said, the sooner you have at least an outline ready, the better for your business.

Succession plans require a lot of time and effort. This is why many businesses plan for succession well in advance, and business transition planning takes place long before there’s a buyer ready or disaster strikes. Succession plans are contingency plans and should be taken as a way forward for any event in which dramatic changes to the business will occur.

Why Is a Succession Plan Important?

Here are some essential benefits of creating succession plans:

It Protects the Future of Your Business

Bad things can happen to any enterprise, no matter how careful the people running it are. Employees leave, business owners become unable to run their companies, the market becomes hostile, and so forth. How then do you safeguard your business operations from any of these often unforeseen circumstances? That’s where a succession plan comes in. Just like we have various types of insurance to give us cover from mishaps, a succession plan is an insurance policy for your business’s continuity.

It Aids in Identifying the Most Qualified People in Your Company

One of the most important benefits of succession plans is that they allow business owners to see which employees are best suited for the transition. This is a key aspect of succession planning for business owners and plays a key role in the continued success of the company’s operations.

With a succession plan, you get to see which of your employees are most qualified as future leaders. It also helps to narrow down which positions within the company are most critical for its success. It can also shed light on potential vulnerabilities, helping identify and remedy them.

For example, If there are no employees suitable for leadership roles within your organization, you would know to look externally early on. In the same vein, business succession planning is a process that could lead to increased employee retention and motivation, as it lets hardworking members in the organization know that their efforts have been noticed and encourages others to do better.

It Helps Create a Training and Development Structure

Building on the previous point, another benefit of succession planning is fostering an environment friendly to training and development. One other positive thing about identifying leadership prospects is picking out competency gaps and filling them by training your staff.

Professional development can come in many forms, such as mentoring, coaching, giving staff increased responsibilities or even job shadowing. Some positions may require employees to head back to school for further education or certification.

This early tapping on successors puts you and your business ahead of the curve, giving everyone enough time to prepare and build the skills or experience needed in leadership and other roles. It’s an excellent method to consider even before you start thinking about how to transfer business ownership to someone else down the line. It’s also an excellent way to let employees know you are willing to invest in them.

It Maintains the Brand Identity of Your Business

Succession planning helps identify employees that can keep the torch burning within the company and helps ensure that a brand identity built over several years doesn’t get thrown out the door when there’s a change in power. Even when there’s a new boss around, succession plans help ensure nothing crucial changes.

It Puts Extra Eyes on the Job

Succession planning is a company-wide exercise, meaning that you can have junior managers and veteran staff working together on the same tasks. This can help wring out any weaknesses and further finetune processes and operations.

Resources for Succession Planning

Now that we’ve covered why succession plans are essential let’s touch on what resources can aid the process of making one. A  business succession planning template is a great way to start getting all your business affairs in order and prepare for the future.

You may need help, and a great place to turn to is your accounting firm. Note, however, that this only applies if they are experienced in succession planning. There are other factors to consider, such as the size of your business and the complexity of its operations. How urgent you need the succession plan is also a consideration. You can choose to hire an accounting firm or bring in temporary professional services (free accounting tools are also an option, but most don’t offer succession planning features).

Here are some succession planning resources you can look to:

PwC

PricewaterhouseCoopers is widely known as one of the Big Four in the accounting industry (alongside KPMG, EY, and Deloitte). The company has an extensive background in succession planning and is a great fit for small businesses as it mainly focuses on smaller privately-owned enterprises.

SCORE

SCORE’s well-developed guide on business succession planning is a fantastic resource. SCORE is one of the largest networks in the world, providing small businesses with access to mentoring. The best part is that as a small business owner, you can ask to be paired with a mentor that’s a perfect match (these business mentors volunteer their assistance). It’s an option you should seriously consider if you require help with succession planning.

Local Accountant

If a local accountant is experienced with succession planning, then they’re a good option to consider as well. You can ask around your network for contacts, try to use your local Chamber of Commerce, any business support groups you know about, or just search for a certified public accountant in the American Institute of Certified Public Accountants directory.

Steps To Creating a Succession Plan

Succession plans can be tough to work on. However, there are some steps you can take to make it easier and create a better succession plan template. Let’s go over them:

Succession Timeline

Succession plans can be split into two types: an exit succession plan and a death-or-accident succession plan. The former covers the transfer of ownership at a specific date, while the latter deals with the event of owner death or disability. 

An accident plan can be considered at any time but exit plans should be written when retirement is close by or the owner wishes to leave the business. There should be a specific date in mind when the transfer would take place, and the plan should also indicate whether you would still be involved after the exit or want to be done with the business completely.

Determine Your Successor

Who takes the reins after the business owner’s departure?  Many owners hand the reigns over to their families in business succession planning, and children often continue the family business. Sometimes, it is handed over to a  business partner or one of its key employees. Other times, the business is outrightly bought by an outsider.

It’s a tough decision, but the successor must be someone that cares about the business and has similar values as the owner. Keeping it within the family is great, but you should bear in mind that most second-generation businesses have a high failure rate. That said, almost a quarter of small businesses fail because they don’t have the right team running the show. This just shows that succession planning is crucial in ensuring that the best people for the job inherit the key responsibilities.

Record and Formalize Your Standard Operating Procedures

Recording your SOPs for future reference is something that every small business owner should do daily. It is beneficial for employees and any future owners. They vary depending on the business, but most SOPs usually include:

  • Org Chart
  • Operations Manual
  • IT Manual
  • Employee Handbook
  • Training Programs
  • Skill Retention Strategies
  • Performance Management
  • Meeting AgendasEvaluate Your Business

There are many succession planning best practices, but one of the most essential is evaluating your business. How much is your business worth? You should have a rough idea about this at any stage of running your business. Don’t make the mistake of overvaluing your business, though, as it can lead to poor financial planning.

There are various ways to do it, too, from using a business valuation calculator to a professional appraiser. Some companies like Guidant Financial offer valuation services for businesses. 

Handling the Finances of Your Succession Plan

Your succession plan must cover how someone will buy your business - by paying a lump sum, purchasing it in installments, using credit facilities, or some other option.

You should also have a buy-sell agreement, a legal document where the buyer agrees to an action that enables them to purchase your business. To draft this agreement, you’ll also need to meet with a legal professional, such as a business succession planning attorney.

Succession plans are typically funded in one of the following three ways:

  • Life Insurance: usually more common in family successions. A policy taken out on the business owner can help finance the buyout of the business in the event of death or other events such as owner retirement or disability. 
  • Acquisition Loan: this is money borrowed from a bank to purchase a business. Typically, a buyer can get about 70% to 80% of the purchase price from a bank or the Small Business Administration (SBA).
  • Seller Financing: or installment payments, occurs when the buyer pays for the business gradually after a down payment has been made, usually about 10% or higher.

Final Thoughts

One mistake many make is not reviewing their plans after they’ve been made. Succession planning in business is something that has to be reviewed regularly, and changes sometimes need to be made on the fly.

Succession planning deals with answering difficult questions and dealing with unexpected events. Who takes over, and how if the need arises? Will the new business owner handle things the same way as the old one did? Which employees and positions are essential, and which ones can the business go on without? With our template, answering these questions should be a lot easier. Don’t forget that you can always seek the advice and services of legal and financial experts that have experience in succession planning.

Frequently Asked Questions
How do I write a business succession plan?

Writing a business succession plan isn’t a walk in the park, but with our template that you can find in the article above, it should be a lot easier.

What is the importance of succession planning in a business?

Small business succession planning is essential for the following reasons:

  • It safeguards your business
  • It helps you identify the most qualified people in your company
  • It helps to create a training and development structure
  • Your business’s brand identity is maintained
  • It puts extra eyes on the job.
What are the stages of succession planning?

There are five typical stages of business succession planning. They are:

  • Succession timeline
  • Choosing your successor
  • Documenting standard operating procedures
  • Evaluating your business
  • Handling the finances of the succession plan.
About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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Instead of leaning on traditional shopping methods, more and more consumers are turning to the internet to purchase items. Mobile phones play a big role here, as they provide a convenient way to shop on the go. What's more, consumers are getting more comfortable with new technologies such as AI, AR, chatbots, and voice search. These eCommerce trends in technology are changing the way we interact with eCommerce platforms and retailers. With all that said, we're confident that you now have a solid understanding of the current eCommerce landscape. Just remember to keep your eyes peeled for new trends so you can stay ahead of the curve.
By Danica Djokic · September 15,2022
As a business owner, you are likely responsible for overseeing all aspects of your company’s operations. This includes setting your own salary. This decision can be difficult to make, especially if you’re not sure what’s standard or how to determine what’s appropriate for your situation. In this article, we’ll discuss some factors you should consider when deciding how much to pay yourself as a small business owner. What To Consider When Setting Your Salary Setting your own salary can be daunting, especially if you’re a freelancer or small-business owner. After all, you need to make enough money to cover your expenses and earn a profit, but you don’t want to price yourself out of the market. So, what factors should you consider when paying yourself from your business? Business Structure One of the first things you should consider is your company’s business structure. Are you a sole proprietor? Do you have a business partner? Are you an S corp? Your company’s business structure will affect how much money you take home and how much in taxes you need to pay. For example, if you’re a sole proprietor, you’ll likely take home less money than if you’re running a corporation because you’ll be paying taxes on both your business income and personal income. On the other hand, if you’re running a corporation, you’ll only be taxed for your corporate income. This means that more of your business profits will stay within the company, which can be reinvested or distributed to shareholders. Business Expenses Another factor to consider when paying yourself as a small business owner is your business expenses. How much does it cost to run your small business? You should consider expenses like rent, utilities, payroll, and marketing. You’ll need to make enough money to cover these costs, plus your personal living expenses. One common mistake small business owners make is not accounting for all of their business-related expenses. Make sure you have a clear understanding of all the costs associated with running your business before you start setting your salary. Personal Living Expenses In addition to business-related expenses, you also need to account for your personal expenses, such as housing, food, transportation, and health care. Again, one common mistake people make is not accounting for all their personal expenses when calculating the business owner’s salary. Industry Standards Another factor to consider is industry standards. What do other businesses in your industry pay their employees? This will help you determine a reasonable salary for yourself as the business owner. Of course, you don’t want to undervalue your services.  Ultimately, setting your salary comes down to determining what you need to earn to cover your costs and make a profit and then finding the right balance between pricing yourself too high and too low. By taking the time to consider all the relevant factors, you can ensure that you set a fair and competitive price for your services. How to Calculate Your Owner’s Pay You should consider a few balance sheet items when calculating your salary as a small-business owner. These include your monthly net income, all business-related taxes and fees, and business expenses.  According to some small business revenue statistics, 86.3% of small business owners earn less than $100,000 a year. However, this does not mean you must stay within this bracket. Below are some steps you can take to get a clear picture of a small business owner’s salary and how to calculate it yourself. Calculate Your Monthly Net Income Your monthly net income is the total revenue your business brings in minus any taxes or fees. This number can fluctuate from month to month, so it’s important to take an average over a period of time to get an accurate number.  Next, you’ll need to subtract all business-related taxes and fees. This includes income taxes, self-employment tax, and any other business-related expenses. Once you have your monthly net income minus taxes and fees, you’ll be left with your profit.  Calculate Your Tax Savings The next step in calculating owner pay is determining your tax savings. This includes any deductions you can take for business expenses, home office expenses, and health insurance premiums. You can consult with a tax professional or use a tax calculator to get an accurate number. Once you have your tax savings figured out, you can add this amount to your monthly net income to get your total monthly compensation. Calculate Your Business Expenses The final thing you’ll need to consider when setting your salary is your business expenses, including office rent, utilities, supplies, and employee salaries. Once you know how much it costs to run your business each month, it will be easier to calculate how much to pay yourself as a small business owner. One mistake many small business owners make is not accounting for their salary when calculating their business expenses. This can lead to severe financial problems down the road, so be sure to include yourself in the equation. By following these steps, you should be able to come up with fair and reasonable compensation for yourself as a small business owner. Remember to avoid common mistakes, and you’ll be on your way to success.  Ways To Pay Yourself As a business owner, you have two options: Either pay yourself a salary or take distributions from your small business. Here are the pros and cons of an owner’s draw vs. a salary.  Paying Yourself a Regular Salary To pay yourself a regular wage, just like you would an employee, you’ll need to set up payroll for your business and withhold taxes from your paycheck. One advantage of this method is that it can help you separate your personal and business expenses and make it easier to track your business expenses come tax time. The downside of drawing a salary is that it’s subject to payroll taxes, which can eat into your earnings. Additionally, if you have a slow month or two, you may find yourself struggling to cover your personal expenses if you’re relying solely on your business income. An Owner’s Draw If you are self-employed and paying yourself a salary, an owner’s draw is another method you can use. This method is often used by small business owners with irregular or variable income. With an owner’s draw, you simply draw money out of your business bank account as needed to cover your personal expenses. One advantage of this method is that you don’t have to worry about payroll taxes. Additionally, it can give you more flexibility regarding how much money you take out of your business each month. However, one downside is that it can be challenging to track your small business expenses come tax time. So, which method is right for you? How to pay yourself as a sole proprietor? Ultimately, it depends on your circumstances and the needs of your business. If you have a stable and predictable income, having a regular salary may be the best option. However, if your income is variable or unpredictable, an owner’s draw may be a better option. Final Thoughts Paying yourself as a business owner can be a tricky task. And there’s no universal rule on how much business owners should pay themselves. However, by following some simple guidelines, you can ensure that you are fairly compensated for your work without putting your business finances at risk.  What’s most important is to find a method that works for you and your business. And, of course, to avoid any common pitfalls.
By Nikolina Cveticanin · September 14,2022

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