Small businesses are integral to the fabric of local communities, providing products and services that meet local needs and preferences. In Louisiana, businesses with fewer than 500 employees make up 99.5% of all businesses in the state.Â
While 90% of U.S. businesses are family owned, less than half of these companies succeed into the second generation and just 13% survive into the third.
For small business owners, succession planning is not only important to ensure the future of their business, but also for the community at large. As a New Orleans resident, I know the importance small businesses play in our community. Small businesses drive Louisiana’s economy and good business planning can improve your company’s value, your retirement plan and more.
Over the years, I’ve had the privilege of working alongside many local business owners to help them create a succession plan that ensures the success of their legacy and secures their business’s future.
When you own a business, leaving is more complex than providing a standard two-week notice. Owners and business leaders need to have a road map in place so it’s clear who will take over the business and what the future of the company will look like. Yet, few businesses have succession plans in place because owners don’t know where to begin. With this in mind, here are four strategies to consider when planning your succession.
• Deep dive into your values and cash flow. To start developing a retirement and succession plan, you should begin by deeply analyzing your values. After deciding what is most important to you, focus on your goals and timeline. Knowing when you want to retire, how much you need from the business when leaving and who you want to take over will help you develop a customized plan later.
Next, you should analyze your cash flow. Look at what and who you are paying for. Consider what your business currently pays for and whether it will need to be covered out of personal cash flow once you’ve transitioned out of your role. Be sure to identify key individuals on your team. Assess the value of your business and list out all your assets before moving onto the next step.
From here, you should compare your values to your cash flow. Your goal should be to align your values and cash flow. If they don’t line up, decide what changes need to be made and how these changes will be implemented.
• Begin exit planning. After reviewing your goals and current values, you should begin exit planning. It is important to first consider this from a nonvoluntary exit approach. What if a key employee becomes disabled or dies? What if you or a co-owner becomes disabled or dies?
After planning and managing this risk, you can build your voluntary exit plan. This step should focus on who will be a part of your plan and how your plan will be carried out. Some options include deferred compensation, employee stock ownership plan (ESOP), gift, installment note, etc. When choosing how your succession plan will be implemented, be sure to analyze all your options.
• Conduct a risk and investment audit. At this point, you should perform a risk and investment audit. Young business owners should invest their profits back into the business. As business owners mature, they should begin to diversify assets and income. Risk and investment audits should be ongoing and when major changes occur, the succession plan should be re-evaluated.
• Ensure you keep key team members. Strong team members are an essential part of a small business and are key factors in the effective execution of a succession plan. Owners should recognize these members when developing a succession plan with incentives like a comprehensive benefits package to encourage employee retention. For example, one incentive plan for key employees that are integral to business succession and transition might include an ownership-like opportunity, without giving away ownership of the business.
While it may seem daunting, succession planning is one of the most important things you can do for your business. A financial advisor can help manage the process, walking you through each step to ensure your plan meets your personal and business goals. Once your plan is in place, your advisor can help review and update your plan through the years as your life and business evolve. Whether you are a small- or large-business owner, it is never too early to begin a succession plan.
Rebecca M. Gustafson, CFP, MSFP, AEP, ChFC, CLU, CAP, RICP, CASL, LUTCF, CLTC is an estate and business planning specialist with Northwestern Mutual. She can be reached at (985) 290-6745.
