With the current economic downturn, some small business owners are considering succession planning. But where do you start?

Here are the top ten crucial steps for small business owners to take when creating a succession plan.

1. Start early and get professionals involved: Start planning for succession ideally at least 5 years before you want to exit the business. Build a team of advisors which should include a financial wealth advisor, a CPA, a succession planning expert, a valuation specialist, a trust and estate attorney, business insurance broker.

2. Obtain a business valuation: to determine its worth and how much the successor will need to pay for it. Don’t try to do this alone. A valuation specialist will use a few different methods (leveraging the current book value of your business, sales of comparable businesses and a discounted cash flow) to determine a price range at which you can sell or merge the business.

3. Consider tax implications: Work with a tax professional to determine the tax implications of the transfer of ownership and assets and how to minimize the tax liability to you.

4. Asset Protection: Implement strategies to protect business and personal assets, reducing potential risks during and after the transition. This might involve creating separate legal entities or trusts to safeguard assets. Speak with a trust and estate attorney to determine how to protect any assets, monies, ownership you will receive after transitioning out of your business. It’s also important to discuss how to minimize any estate taxes borne by you or any beneficiaries upon your passing.

5. Create a buy-sell agreement that outlines the terms of the sale, including the purchase price and payment terms. Establish clear and legally binding buy-sell agreements that dictate how ownership interests will be transferred in different scenarios, such as retirement, death, or disability.

6. Financing Options: Explore financing options for the transfer of ownership, such as seller financing, 401K rollovers third-party loans, or equity participation by successors.

7. Cash Flow and Financial Projections: Develop comprehensive cash flow and financial projections that account for the potential financial impacts of the succession plan. Ensure that the organization can maintain its financial stability during the transition. The financial projections should also communicate to the intended owner the expected health of the business.

8. Insurance Coverage: If you have a partnership, having certain insurances will protect the interest of one partner if the other passes, decides to leave or sell their interest. An insurance policy with a buy/sell agreement can provide liquidity for one to buy out a deceased partner’s share of the business. Having key-person insurance is also a consideration.

9. Plan for contingencies: Develop contingency plans to address unexpected financial challenges that could arise like changes in economic conditions or another event that could delay the transition. Set aside 3-6 months of expenses and cost of transition in reserves or establish a credit line equivalent to the reserve amount.

10. Review and update your succession plan regularly (every year) at least with your succession plan specialist to ensure that it remains relevant and effective.

At FinCore, we support our clients who are succession planning by:

  • Making sure the business is financially healthy and sound so it warrants a good sale price
  • Preparing any financial reports and forecasts communicating the current performance and projected growth of the business
  • Ensuring financial policies, procedures and internal controls are in place and documented
  • Helping the CEO make strategic business decisions throughout the entire process so they feel at ease and confident in their decision making

If you’re looking for a right hand in the process of succession planning, book a Financial Consult with us at FinCore.

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Tricia Taitt is the CEO and Chief Financial Choreographer of FinCore. She holds an M.B.A from The Fuqua School of Business of Duke University, and a BS in Economics with a Finance concentration from The Wharton School at the University of Pennsylvania. For over 20 years, she’s been a finance professional. Half of the time was spent working on Wall Street while the other half was spent in the trenches side by side with small business owners. As a result of working with FinCore, clients have been able to take control of their numbers and feel more confident in their ability to make decisions, while increasing profits by 10% and building a cash stash to invest in growth. Follow Tricia on LinkedIn and Instagram.