Starting a business is an exciting proposition, but it’s also an incredibly challenging undertaking. However for most small business owners, planning an exit strategy is something that most don’t have the time to think of.

When successful business owners reach a certain age, it becomes imperative that they address the issue of succession planning. For most small business owners they have been dodging this particular conversation for years. 

There are three widespread myths when it comes to small business owners and planning for their business succession. 

There is definitely a need to discuss this matter with an experienced financial planner who can break down these myths that are common to all small business owners but who will also address the emotions and family dynamics that exist in many small businesses.

1. Myth One – There is plenty of time

In business succession planning, time is either your ally or your enemy. You can spend time planning for succession at your leisure during the time your business is active or postpone planning and wait until the choice is no longer yours and succession planning becomes more uncertain and expensive.   

2. Myth Two – Selling is easier

Nearly all business owners have an idea of the worth of their business based on revenues, fixed assets, and a variety of balance sheet items. However a common mistake when pricing a business is building “sweat equity” into the equation or including what the potential could be; for a new owner it’s really only about fixed assets. The truth is that valuing a business for sale is difficult.

3. Myth Three – No-one will run the company better than me

Most business owners who established and grew a business firmly believe that without them the business would fail. The idea of being irreplaceable in growth years is what the majority of business owners try to achieve, however in later years that same business becomes a burden to them. One of the most important things is to find a successor who shares the same attributes as you, but who perhaps can “turn the key” slightly differently to take the business to the next level.

How do you develop a succession plan?

There are no rules about what your plan should cover or the level of detail it should contain. Among other things, your plan will depend on your objectives, family situation, financial position, health and age. To be successful a plan should be workable and developed with input from groups and individuals who have an interest or share in the business. You should also talk to your business advisors such as your accountant, lawyer and financial advisor.

Here are a few points to consider when developing your succession plan: 

  • 1. Who will be your successor? 
  • 2. How much is your business worth? 
  • 3. What sort of management strategy should you adopt for existing staff to ensure a smooth transition? 
  • 4. How will your departure affect key business relationships such as suppliers and major customers? 
  • 5. Do you need to establish an estate? 
  • 6. Do you need provisions for active and non-active family members? 
  • 7. How much income do you need to retire or leave the business? 

It’s important to ensure that your plan is realistic and achievable. 

Once you’ve designed the plan, it’s a good idea to set a timetable for completion and to schedule key milestones along the way to help keep you and your successors on track towards a smooth transition.

Carla Seely is a Senior Wealth Manager at AFL Investments.  She may be reached at 294-5712 or cseely@aflinvestments.bm