After putting in work for years, your business has finally taken off. You’re a young company, still in growth mode, and you’re hoping you have everything covered. But do you know who will take over when you retire?
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You are never too young or too old to create a succession plan for the business you have worked so hard to cultivate, according to Maura McKenna, senior vice president of corporate banking at Atlantic Capital Bank. Oftentimes business owners either have a plan that is too outdated to use, or haven’t even sat down to create a model of what their business will look like once they hand over the reins.
“Owners are integrated in so many aspects of the company -- overseeing the operations of the business -- that they aren’t focused on their personal wealth or a personal succession plan,” she said.
McKenna said she often counsels owners in the Baby Boomer generation who have worked hard to build up their closely-held business and want to one day retire, but aren’t sure how to plan for it.
“I’ve seen this at play in situations with a stronger, maturing, middle market company that has hit some level of success,” she said. “It’s often ten-to-12 years into the life of the company, and the owner has worked it into a profitable, successful company.”
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Create a succession plan early on, and keep it current, McKenna said. Updating every five years is a solid guideline for business owners. Here are some other things McKenna said to think about when creating a succession plan for your small business.
No. 1: Review your company’s operating agreement. McKenna said this needs to spell out some sort of succession planning that allows your employees to buy stock and outlines succession for certain leaders as well.
“This should parlay in alignment with the estate plan that the individual business owner has,” she said.
No. 2: Find out what your company is worth. “Look into having some value on the company—what is its valuation if sold?” McKenna said.
Also think about potential buyers, McKenna said. Values can change from year-to-year so look to a professional to perform your valuation review.
No. 3: Decide who is eligible to purchase company stock. McKenna said before leaving your business, you should determine who can purchase company stock, and also to be sure they have some “skin in the game.”
“They should put some of their wealth on the line when purchasing company stock,” she said. “It’s important that the employees view the purchase of stock and equity in the company as important to their own plan. So if the value goes up, [it’s] because of their performance and success.”