Planning For Success-ion
9 Tips to Help Your Business Succeed in Transition
“Proper preparation prevents poor performance,” my grandfather used to say, whether talking about his garden, his golf game or life. Certainly the adage is true when it comes to success in business, and even more so when it comes to the success of your business in transition. Transition is inevitable in business – business partners suffer significant changes in circumstances (death, divorce, bankruptcy, etc.), employees come and go, and elder generations seeks to pass the business on to the next. With a good roadmap to guide you, the storms of transition won’t throw you off your course to success. Here are nine quick tips to consider in developing your succession plan.
1. Ask yourself the Who? What? And When? questions.
2. Seek out qualified advisors. An experienced attorney and accountant bring a wealth of knowledge to the table and can provide you with many ways to achieve your goals. There is no “one size fits all” strategy for business succession planning, but there are many proven avenues you can travel. Don’t be shy about telling your advisors what your budget is. Most will work with you to develop a plan that won’t break the bank.
- Who are the stakeholders in your business? - owners, key employees or up-and-coming family members to consider.
- What are you trying to achieve in your business? - are you planning to grow your business and eventually sell it, or to create something that invites your children and grandchildren to get involved.
- When do I need to begin? The best time to plan is NOW! Whether your business is just getting started, or you have been at it for years, there is no time like the present to lay a solid foundation for the transition of your business.
3. Decide what type of entity is the best fit. There are no less than 10 different business entities available to choose from in Texas. Each has benefits and limitations. Limited liability companies are the most popular and provide a tremendous amount of flexibility.
4. Determine how decisions will be made. In a typical business structure, the owners (e.g. shareholders, members, limited partners) elect the day-to-day decision makers (e.g. board of directors, managers, general partner) who, in turn, delegate some of their authority to specific individuals (e.g. president). Decide how the authority within your company will be shared.
5. Deal with death. Small businesses are successful because of the unique mix of talents, experience and contacts that the ownership group possesses. Change the personalities - change the working relationship. In the event of a death, address the impact it will have on cash flow. “Key man” life insurance can provide necessary cash to help sustain the business during transition. Also consider including an agreement to acquire a deceased partner’s interest. You may really enjoy working with your business partner, but would you say the same about his spouse or children?
6. Don’t overlook the impact of divorce, bankruptcy, or disability. Like death, these are significant threats to the success of a business. Good planning will help you overcome these game-changing events.
7. Shareholders as employees. Many successful businesses rely on a key employee or two for its success. Offering those key employees an ownership stake in the business is a proven strategy to keep them employed and motivated to continue investing in the company’s success. If an employee becomes a shareholder, it is a good idea to have a well written employment agreement. Spell out the employee’s duties, salary and benefits. Include objective criteria for continued employment. Then, tie the employment to ownership of the stock. If the employment agreement is terminated for any reason, then a sale of the stock is triggered (or not) depending on one’s particular circumstances.
8. Business Divorce. Prospective business partners are always willing to figure out how they are going to divide all the money they are going to make but are hesitant to address the what-if’s of a breakdown in the business relationship. Disagreements happen in the best of relationships. Include what is commonly called a “Business Divorce” provision in your planning: a process that results in one or more persons continuing to own the company and one or more persons exiting the company and being compensated fairly for their ownership stake.
9. Valuation. Fairly valuing a stakeholder’s ownership position plays an important role in the transition of a business. Set the value too high and you punish the business. Set it too low and you punish the outgoing stakeholder. Strategies used to value a business include getting an appraisal, using a formula to arrive at a fair value, or periodically setting the value of the business by agreement.
Navigating your business towards success demands that you plan in advance for the storms that will come. Don’t be tempted to believe that it won’t happen to you. Take the time to develop a plan with your business in mind, your goals considered, and your success in the balance. As my grandfather also said, “When you fail to plan, you plan to fail.”