When should you start business transition planning?
By ATB Financial 16 February 2021 3 min read
As business owners seek the next leaders of the company they run, one of the many priorities ahead of them is determining when to draft their business transition plans. In truth, the answer is fairly nuanced.
The data demonstrates urgency. A Forbes survey revealed more than half of business owners lacked a succession plan, and 47 per cent of those over 65 didn’t have a formal transition plan. The good news is it’s never too late to begin laying out business transition plans even if you won’t leave or sell the company anytime soon.
You never know when an emergency could give rise to a situation where business transition plans have to be activated, says Amanda Vella, senior director of Business Advisory and transition consultant at ATB. “And because business owners on average have 80 per cent of their wealth tied into their business, not having a plan in place could jeopardize that whole family’s wealth, and planning ahead can give business owners that much-needed peace of mind.”
For this, and many other reasons, business owners should begin their business transition plans as soon as possible. “There’s a correlation between successful companies and visionary leaders, so business owners should look beyond their own individual contributions and their endgame, and lay out a long-term vision for their company, which includes strategies and tactics for finding the right successor when the time comes,” says Vella.
Boosting your business’ appeal, grooming the best successor
Creating a strong succession plan goes a long way to making your business an attractive sale, if that’s one of the strategies for an exit, says Vella. “These plans show how business owners are seeking to make their company saleable and scalable,” she adds.
Part of that scalability comes down to not only finding the right successor to take the lead, but ensuring you have a strong management team that can run the day-to-day regardless of the transfer. This can be a time-intensive process. As this post on CareerMinds puts it, “This means that every organization—regardless of size—should start succession planning as early as possible because grooming leaders for high-level roles isn’t something that can be achieved overnight. It can take a long, long time before they are ready to make the switch with a more senior staff member.”
Thorough business owners will also recognize the importance of starting transition planning early to better assess the viability of one potential successor over another. A McKinsey report advises that transition planning should be a multiyear structured process tied to leadership development.
Time to get writing the transition plan
The first step to creating a strong transition plan is writing down all the details. When you craft a written succession plan, it should cover the five to 10 years up to the transfer of ownership, as we’ve noted before. A good transition plan should include:
- A business plan which includes an assessment of business readiness and attractiveness for an exit, along with an action plan for improvement.
- A valuation analysis and exit option analysis with preferred exit strategies identified.
- An assessment of the owner’s readiness to exit.
- Tax planning.
- Estate planning.
- Wealth planning.
- Life-after-business planning .
We also recommend having a plan in case of an emergency identifying an interim leader.
By starting as early as possible on a transition plan, owners can reduce the amount of work they have to take on later in the lifespan of their business. Identifying challenges, and also conducting a SWOT analysis of the business, can help owners feel at ease knowing they can overcome the hurdles that may encounter as they get closer to finding a successor and initiating their transition plans.
How often should business owners revisit their succession plans?“I’d say annually, but especially when a major life event has occurred, such as a divorce, if the business is family-operated, or if there’s a death that could affect business operations,” says Vella.
Preparing their succession plans in advance can help business owners not only protect generational wealth, but also the future value of their company. And that kind of proactive work can go a long way in shaping a business’s legacy.
Find out more about selling your business successfully with ATB’s Business Transition Guide. Want to talk some more? For tailored advice around business transition planning reach out to our Business Transition team at firstname.lastname@example.org.