Kapadia LLP CPAs

Imagine looking into a crystal ball and seeing the future of your business. If you don’t have a succession plan in place, you may not like what you see. But if you’ve planned ahead by creating an exit strategy and know who will take over the reigns, you’ll most likely see a business that thrives well into the future.

You may be surprised to learn that 73% of business owners over the age of 43 would like to exit their business within the next 10 years. And 60% of these businesses have completed a formal valuation within the last two years.

As a small business owner, it’s important to have more than just a business plan. You also need a plan to ensure a smooth handoff when it’s time for you or other leaders to leave or retire. That’s where a succession plan comes in. Let’s dive in.

Why your business should have a succession plan

Let’s say you decide to retire or one of your beloved managers announces they’re leaving. Panic may set in while you think, “What’s going to happen next?” But when you have a well-crafted succession plan, fear can fall by the wayside. A succession plan ensures:

• Business continuity. A succession plan minimizes disruption and ensures that business can run smoothly without interruptions if a key leader or employee suddenly leaves.

• Customer confidence. Continuation in leadership and operations helps maintain customer trust and relationships, which are essential for small businesses.

• Risk mitigation. Sudden departures can create chaos and uncertainty, especially with finances, but a succession plan reduces these risks because there’s someone prepared to step in.

• Talent retention and development. A succession plan provides clear career paths for each employee, and it also helps nurture employees to grow and stay with the company.

• Knowledge transfer. Critical institutional knowledge and expertise from experienced leaders are retained within the company and passed along to emerging leaders.

Succession planning is important for small businesses to prepare them for future changes, minimize risks, and support the development and retention of staff. It also helps the business remain stable in uncertain times.

Risks of not having a succession plan

Without a proper succession plan, your small business can become vulnerable to a wide range of risks, including:

• Loss of customer trust. Leadership changes and inconsistent service can undermine customer confidence and loyalty, leading to loss of business.

• Operational instability. The sudden departure of key leaders or employees can affect day-to-day activities and overall business performance.

• Increased recruitment costs. Hiring external candidates can be costly, especially when you consider recruitment fees, training and the time to get new hires up to speed.

• Gaps in knowledge and skills. When key leaders leave without transferring their knowledge, you lose access to valuable insights and expertise. It can also lead to a skill shortage that is time-consuming and costly to fill. These gaps can be detrimental to decision-making and operational efficiency.

• Decreased morale. When unplanned events occur, such as a loss in leadership, employees can feel uncertain about their future with the company, which reduces morale and productivity, and can contribute to high turnover.

• Compliance and regulatory risks. A sudden change in leadership can lead to a lapse in compliance with industry regulations and standards, which could result in legal and financial penalties.

It’s imperative to have a plan in place to mitigate these risks and ensure the smooth continuation of your business.

Succession plan options worth exploring

Small businesses have several options to explore when it comes to succession planning and ensuring a smooth transition and continuity of the business. Consider the following four options:

1. Keep it in the family. Consider passing your business on to family members to ensure your legacy continues the way you envisioned. It’s important to verify that your family members are interested in—and capable of—taking over the business. You’ll also want to provide the necessary training for leadership roles and maintain open communication to manage expectations.

2. Sell to employees. Think about selling your business to a loyal employee or group of employees. They’re the ones who understand your company best and will want to see it succeed. You could establish an employee stock ownership plan (ESOP), where ownership of the company is held in a trust, and the trust buys the company on behalf of the employees. Employees don’t pay out of their wages, but they gain ownership in the business.

3. Find an external buyer. Selling to an outside buyer allows for a clean exit strategy, but it requires more work. You’ll need to obtain a professional valuation of the business and analyze the market to find any potential buyers.

4. Consider a merger or acquisition. Merging with or being acquired by another company can give your business the resources and market reach it needs to grow. This option will require due diligence when identifying potential partners and ensuring that their financial health, operations and culture are a good fit for your long-term goals.

Ensure a smooth handover

Succession planning may seem overwhelming. That’s why it’s important to work with professional advisors who can address any tax, financial or legal implications and help you choose the right path for your business. Your business is your legacy—protect it with a succession plan.