The family business you built and grew is one of the most important achievements in your life. Aside from its personal importance, though, your business is vital to your local community and its overall economic health. Over half of the jobs in the United States exist in family-owned businesses, and they account for over 75% of all new jobs created. This makes the continued success of your business not only a matter of personal importance to you, but to the economic strength of the country. But how can you be sure your business will survive beyond you?
A succession plan details how your business will be smoothly passed on to the next generation. Whether you decide to keep ownership and management in the family or select an outside successor, having a plan in place is vital to your business’s continued success.
Why Have a Succession Plan?
Succession planning means more than just choosing who will run your business and how you will divide up ownership. It means creating a purposeful and explicit transfer plan that maximizes your business’s chances of success. You may want to remain partially active in the company to smooth the transition. You may have thought about who in your family will be the best steward for your business. But without a written plan, it is unlikely the transition will be successful.
The fact is, only about 30%-40% of family-owned businesses become second-generation businesses. This isn’t due to poor business models but rather the lack of good succession planning. If you want to beat these odds, then it’s time to think about creating a robust succession plan for your business.
When Should I Create a Succession Plan?
Some business advisors suggest building a succession plan into your initial business model. However, if you are like most business owners, you haven’t done this. In fact, most business owners don’t have a plan in place at all. At minimum, you should solidify a succession five to ten years before your retirement. This gives you a chance to train and prepare your successor for the responsibility of managing or owning your business. It also allows you to adjust or change the plan if needed. Obviously, the further ahead of time your plan is in place, the more likely it is to succeed.
It also protects your business against the unforeseen: if you were to suddenly be unable to run the business, could someone easily step in? If the answer is no, then you need to be thinking about a plan.
Talk to your family early about your plans for the company. It is likely that not everyone will be happy with your decisions, but keep in mind that your business is the priority in this process. It’s better to deal with the disagreements early rather than at the moment of transfer, lest your business fall into less experienced hands.
What do I Need to Successfully Create a Succession Plan?
Once you know who your successor will be, you need to make sure that they are logistically able to run the company in your stead. Again, it’s better to do this early rather than later in case of unforeseen circumstances.
Accounting
You’ll want to make sure all your books are organized and in order. This means having easy-to-locate records of transactions, financial statements, and accounts. You are likely using accounting software such as Autobooks for this, so your successor should not only have access to the but be trained in how to use it. They should be able to pay employees, send and receive invoices, and access any and all financial information for tax purposes.
Banking
Giving your successor access to accounting tools and information won’t matter if they can’t access the business’s finances. Perform an inventory of all of your business banking relationships and, systemically, provide them with the proper level of access. You don’t want to run into a situation where a deposit account or line of credit can’t be accessed—this could result in employees or vendors not getting paid. Beyond accounts, successors should have access to all online banking, cash management services, and any other service that facilitates your business’ finances.
Supply Chain
Maintaining the consistency of your supply chain ensures that your product or service to clients remains consistent as well. Before passing off supply chain information, you want to make sure all the contact information, contracts, pricings, etc. is up to date. You’ve likely developed relationships with your vendors over the years, and you’ll want to make them aware of the change in ownership/leadership. Your successor should feel comfortable making orders and paying invoices to avoid unnecessary hiccups in the supply chain.
Insurance and Employee Benefits
A change in leadership can be anxiety-inducing for the employees of your company, who will be uncertain about the future. Having an explicit plan for their insurance and benefits will alleviate this and help them feel secure going forward. Some important information to share with your successor are:
- Group health insurance plans, and vision/dental plans
- Any documents covering deductibles, networks, copays, etc.
- Life Insurance policies
- Beneficiary information, other important information
- Disability insurance plans
- Retirement plans
- Documents detailing contributions, vesting schedules, withdrawing options
- Documents showing current employee balances
- Worker’s compensation insurance
Before transferring ownership, make sure all your insurance complies with state and federal regulations. Any changes being made to insurance or employee benefits should be outlined in the succession plan and clearly communicated to your employees.
Contracts
Contracts and agreements form the backbone of your business, and they tend to accumulate up over time. For a successful leadership transition, you should be able to locate and give your successor the following contracts:
- Operating agreements
- Buy-sell agreements
- Client contracts
- Vendor contracts
- Employment contracts
- Leases
- Non-disclosure agreements
Don’t just hand these contracts over. You’ll want to review the details of each with your successor and answer any questions they have. If you’re concerned about your current contracts and their legality, consult with an attorney. Make sure everyone is on the same page about the contracts and what they mean for the business.
Tax Documents
Your successor should begin forming a relationship with your accountant and have access to all necessary tax documents. This includes documents related to your business’s tax history, which may be important for audits and complying with tax regulations. These documents will vary by business, but common ones are:
- Business and employee tax returns
- Tax credits
- Asset list
- Liability list
Your accountant should be an active part of succession planning, as they have valuable insight into specific tax implications and compliance matters.
Let the Government Know
Depending on your business, there may be paperwork to file with state and U.S. agencies government regarding your succession plan. The Texas Department of State is good place to start to understand potential filing obligations.
About Mood Bank and Texas Business Community
Wherever you are in your business-owning journey, you are always looking towards the future. Moody Bank’s experts in business banking can inform you of account and treasury management options. Moody Bank received its charter in 1907 and has been supporting Texas small businesses ever since. Stop by any of our Austin, Houston, or Galveston area locations, or contact us to set up an appointment with a business banking professional!