For years, you’ve put your heart into building a successful business. But have you considered how you’ll say goodbye? A recent study suggests that six out of 10 business owners plan on selling within the next decade.1
If this sounds like you, the time to start thinking about a comprehensive succession plan is now.
A succession plan is key to growing your company’s value, ensuring a smooth transition, and helping you make your next steps more intentional.
At Toberman Wealth, our focus is on helping business owners grow, manage, and transition their businesses. If developing a succession plan is something you need to start considering, we recommend focusing on these seven building blocks first.
1. Set a Realistic Departure Timeline
Most businesses don’t sell overnight. The transition process takes time and thoughtful planning, which is essential for protecting the future well-being of your business and potential successors.
If a transition is coming, help ready your managers, employees, contractors, and other involved parties for the change. New leadership can be intimidating to current employees, so use this time wisely to get them comfortable with the transition and excited for what’s to come.
As the process of selling or transitioning your business begins, our team is here to help. We’ll take a look at all aspects of your larger financial picture, including:
Your current savings
What the business is worth
How it plays into your estate plan
Getting the complete picture of where your business stands today and what you’d like to see for it in the future can help us develop a custom timeline that works for you.
Consider Your Emotional Well-Being
As you think about timelines, don’t forget to consider your emotional well-being. It may take some time to emotionally prepare to step down as CEO or president. This company is something you spent years building. What will life look like once it’s out of your hands?
It’s often best to consider a transitory position to help ease into this next chapter. These positions can keep you involved in higher-level decisions regarding your business, without requiring your attention for day-to-day operations, like becoming chairman of the board, consulting with leadership, or offering your assistance part-time.
Operating in this way tends to be a more feasible option for business transitions that stay within the family. If you’re selling to an outside third party, they might not want your involvement after the sale is final.
2. Know What the Business Is Really Worth
You may already have a ballpark figure of what your company is worth. But before starting to plan your exit strategy, establish a concrete number with a formal evaluation of your business.
Why is a concrete number important?
Because most small business owners’ net worth aligns with their business’s worth, meaning they’ve tied a lot of their wealth into the business. Because of this entanglement, it’s impossible to know how much you’ll have to sustain your retirement until you understand what your business is worth.
Getting a business valuation will paint a better picture of how much you can expect to walk away with. If you’re likely to get less than you anticipated, you need to decide how to make up the difference.
Your business’s value is an important consideration, as it could impact your timeline for selling the company and whether or not you’ll continue working after doing so.
3. Identify a Strong Successor
What do you want to see in a future leader of your company? Consider these qualities carefully as you decide who will usher your business into its next phase. Who you choose now may very well define your company’s legacy.
There may be pressure to pass your business on to a child or relative, and in some cases, that choice may work out great. Don’t, however, feel like you have to keep your business in the family, especially if you can’t identify a strong leader amongst your blood relatives.
Consider all potential candidates, including strong leaders within your company, trusted colleagues, or other industry professionals. The choice, ultimately, has to be the person you feel most confident in continuing your legacy.
4. Cultivate Steady Leadership
While your successor sits at the helm, it takes an entire team to steer a ship in the right direction. Have steady and robust leadership ready to step in as you prepare your exit strategy.
Success starts from the top-down, meaning your leadership team will set the tone for the transition. If they’re confident and prepared, employees will feel comfortable as well.
But if they’re jumbled, confused, or disorganized, that energy will trickle down throughout the company.
5. Keep Your Employees Bought-In
As a business owner, you already know the value of attracting and retaining top talent. If you don’t want employees jumping ship during your transition, you must keep their feelings and concerns in mind. Keeping employees in the dark will only shock and hurt them.
Instead, commit to transparent communication about what’s happening.
Use this time of transition to take their comments and ideas into consideration. If there are things you can change in the workplace to better meet their needs, don’t be afraid to adapt.
Keeping your employees engaged throughout the transition can help your business better retain top talent as new leadership moves in.
6. Consider the Types of Business-Sale That Make Sense
The way you choose to transition your business is important, especially in terms of taxes. For example, a traditional sale may incur capital gains and income tax.
There are different ways to structure the sale of your business. In some cases, the sale structure may allow you to defer taxes or reduce your overall tax obligation. As you consider the sale of your business, be sure to work with a knowledgeable tax expert who can help determine the right course of action.
What About Gifting?
It may be feasible to gift your business to a loved one. Be sure they’re fully aware of the commitment involved with receiving your business, and they’re prepared to step up as a leader when you step down.
In 2022, you may gift up to $12.06 million, or $24.12 million per couple, federally tax-free during your lifetime. Again, taxes in selling or gifting a business can get complicated, and working with a tax professional is advised before making any significant changes to the ownership of your business.
7. Work With a Team of Specialists
Creating an airtight succession plan for your small business is where we shine. We’re here anytime to help you navigate the ins and outs of a transition. Our goal is to make you feel confident in your and your business’s next steps. Tax planning with a financial planner will help to build your succession plan.
Craig Toberman is the Founder of Toberman Wealth – a fee-only financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.