How to Create a Business Succession Plan

For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

Tutorial: How To Write A Business Plan

For business owners that are at or near retirement, the issue of succession cannot be ignored. This article will take you through the steps you'll need to take to create a successful succession. (To learn about other retirement considerations, see Managing Income During Retirement and Life After Retirement.)

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to simply sell the business lock, stock and barrel. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose, each with various strengths and weaknesses to be weighed and evaluated. In this case, lasting resentment by some or all of those not chosen may result, no matter what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to their partners in a buy-sell agreement.

How much is the business worth?

When business owners decide to cash out (or death makes the decision for them), the first task is establishing a set dollar value for the business, or their share of it. This can be done via appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly...