If you’re thinking about “succession,” you are thinking about what comes after. After you’ve taken your business as far as you can. After your children are old enough to take it over. After you take one of those many unsolicited calls from someone saying, “I’ve got a buyer seriously interested in your business.”
Then you start thinking about what could happen to your business and family if you die – or become too disabled to work. And what if your partner decides to sail around the world, disagrees with you about the future of the business, or goes through a divorce, or – ?
If you are a business owner you already have a job running a successful company and don’t need another one becoming an expert in small business succession planning! You simply want an organized process that addresses all your “what-ifs” efficiently and effectively. Simply put, you want a solution that fits your needs, your business and your goals.
Obsidian Provides that Solution
Every owner, regardless of age, needs a succession plan. And every business, regardless of the number of owners, stage of business lifecycle, or form of organization is at serious risk without a sound, current and comprehensive succession plan in place.
To start, we would divide the planning we do for your business by two types of events: those you control, and those you don’t.
Events You Control
You can plan, orchestrate and benefit during your lifetime from a sale to a third party or employees or children. You may ultimately choose to sell your company to an Employee Stock Ownership Plan, recapitalize or liquidate it. We call planning for any one of these events Exit Planning.
Events You Don’t Control
You can also plan, and we’d argue must plan, for events outside of your control that could threaten or destroy your business. (Your family’s financial security in case of your death or disability is primarily the concern of estate planning.) These events include your death, disability or retirement. They include involuntary transfers due to divorce (yours or a partner’s) and business disputes among owners. We call planning for all of these events Succession Planning.
Small Business Succession Planning In Seven Steps
Step 1: We Begin With You
Be it small business succession planning, exit planning or financial planning, at Obsidian we begin with one question: What are your life goals? Everything we do is focused on your answer.
So, in succession planning, we combine life goals with personal goals as well. What lifestyle do you want for yourself and your family? What activities or relationships make your life meaningful? What do you want your legacy to be?
Only then do we assess the threats, opportunities and strengths of your business, and whatever plan you may have created to protect your business and grow your wealth.
Step 2: Let’s Establish A Baseline
Armed with an understanding of the personal and financial goals you’ve set for yourself and your business, we quantify your current business and non-business resources. That’s the baseline we expect you to use to measure our performance. For some owners, it is also their first objective assessment of the value of their business!
We will work with a certified valuation analyst or other consultant who specializes in valuing businesses to establish a current business value and set up realistic models to project future business cash flow. These projections are key to decisions about which formula to use should a triggering event (death, disability, divorce, retirement, etc.) occur.
Step 3: What’s Your Role In Your Business?
Would you say that you are the center of all things in your business? Would the loss of your (or your partner’s) talent, contacts or financial backing threaten the survival of your company? Would the departure of either one of you cause employees or customers to jump ship? If so, you need a succession plan—now.
Step 4: Time To Talk About Loss
As we mentioned above, the departure of an owner, for whatever reason, creates four serious losses in a business:
- A loss of ownership continuity
- A loss of the departed owner’s financial resources
- A loss of the departed owner’s talent
- A loss of employees and customers.
The point of this step is to examine how your absence (or that of a partner) would affect your business in each of these four areas.
Step 5: Crafting A Solution
Addressing the losses that your company would experience should you (or a partner) leave your business, requires people and dollars. Who can take over the business? Who can replace your talent, your contacts and assure both employees and customers that the business is in capable hands?
Then there’s the issue of funding. Without you in your business, how much would it cost to hire someone who could do what you do? How will a successor pay for your ownership interest? How will your company replace the financial resources (or personal guarantees) that you supplied? Are there funds to motivate employees to stay put during the transition from your ownership to your successor’s?
Looking back at Step 2, we will propose both valuation formulas and sources of funding to solve these thorny succession issues.
Finally, there’s that issue of fairness. For a co-owned business, we will look at loss from both perspectives: 1) How does the solution affect you if you are the remaining owner? and 2) How does it affect you as the departing owner? This is the time to consider what is fair for all parties—not once the triggering event occurs.
Step 6: Integrate Your Succession Plan With Your Estate Plan
As we mentioned earlier, estate planning is the proper tool to make sure your family’s financial security is protected should you have to leave your business. Coordinating your estate plan with your business succession plan, however, is the step too many advisors overlook. This is unfortunate – and as far as we’re concerned, unacceptable – since the business is usually an owner’s most valuable asset. It is also the most liquid. Value and the lack of liquidity provide some unique estate planning challenges that we will help you understand and overcome. Again, we will work with your estate planning attorney or recommend one skilled in crafting estate plans for business owners.
Step 7: Implement And Re-visit Your Succession Plan
It is inevitable: your business will change. If its succession plan does not, or if insurance funding is insufficient, we can almost guarantee that your plan will not achieve your goals. For example, a valuation formula that may have been completely appropriate during the early years of your business may have negative, unintended consequences when the business is more valuable. Or, if the beneficiary or ownership of insurance is incorrect when the triggering event occurs, the agreement cannot serve its purpose. For these reasons, Obsidian implements the very important step of revisiting your succession plan as your business grows. This way, you stay current – and confident – that you are well prepared for anything.
If you have concerns about your family’s financial security and your business’s prospects should something happen to you or a business partner, your next step is to find a guide who has a depth of experience helping other owners solve their small business succession planning needs.
Importantly, that adviser should have no vested interest in any particular exit path, but instead should be driven to address you, and your business’s unique goals.
This is Obsidian.
We will keep you current and informed. We will manage the many moving pieces of your comprehensive succession plan. We will collaborate with your existing, trusted advisers.
In short, we will secure for you the bright and carefree future you have been aiming for all your life.
Call Obsidian at 301-990-4395. The consultation is Free.