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Understanding Small Business Succession Planning: Benefits, Challenges, Legal Considerations & More.

On Behalf of | Jun 27, 2023 | Business And Corporate Law

Long-term planning is an essential element to running a successful small business. Business owners spend valuable time and money setting their companies up for future success. They even sacrifice short-term gains in the pursuit of longer-term benefits. This dynamic makes it perplexing that small business owners often put off one of the most important decisions for the extended success of their enterprise. Delaying succession planning until it is too late can undermine your business and create chaos when you decide to step away.

Succession planning for small business owners is the process of identifying the future needs of your company and finding the right people to fulfill them. Whether handing down a business to your child, selling a business for profit, or simply planning for your company to remain successful through sudden leadership changes, succession planning is critical. Creating a plan to fill key leadership roles quickly as individuals leave the business can pay dividends in the short and long run. A well-executed strategy will ensure your company can always fulfill its critical needs, even when tragedy strikes. It will also help you identify essential employees and better understand the qualifications you should look for when hiring. These benefits are in addition to the peace of mind you will have knowing your business will be capable of operating in your absence.

At Batson Nolan PLC, we know firsthand that long-term planning is a key to sustained success. Since 1860, Batson Nolan has provided effective and knowledgeable legal services to the Tennessee and Kentucky communities. Our attorneys take pride in developing long-standing relationships with clients and constantly improving our services. We can help your small or medium-sized business navigate the complexities of succession planning. Contact us now and schedule a consultation.

Why Small Business Succession Planning Matters

Several factors make having an effective succession plan critical. First, not having a solid plan can be extremely risky. Further, there are many benefits that go beyond mitigating risk, and a strong plan can increase a company’s value.

Not Having a Plan Is Risky

Business environments are typically full of uncertainty and risk. Failing to put a detailed succession plan in place adds unnecessary uncertainty to your business. However, you can solve succession risks effectively and efficiently through strategic planning.

In publicly traded companies, uncertainty around who will run a company can lead to sharp declines in share price. The effect of this uncertainty on a private business might be less obvious, but the costs still exist.

If someone in a vital leadership position suddenly departs and the company has no plan to replace them, the enterprise can instantly lose all that knowledge and experience. Without an adequate replacement, a company can begin to lose efficiency, and its service or product quality can drop substantially. This can lead to lost customers and lower profitability. If the position is critical, the business can spiral out of control.

Further, the power struggle to fill the vacant position can have a negative cultural impact. Uncontrolled competition for a leadership role can create an unpredictable work environment leading to lower productivity and low morale. Dissatisfied workers might end up leaving the company. All this turmoil puts the business at financial risk.

There Are Many Benefits to a Solid Succession Plan

Beyond risk mitigation, there are several benefits that succession planning provides.

First, it helps businesses identify their most qualified leaders. Identifying potential leaders helps make promotion and salary decisions easier.

Additionally, succession planning can motivate key employees. Part of a good succession strategy is training current subordinates to fill positions above them. Training employees for higher positions encourages them to work hard and stick with the company. It also develops a strong leadership pipeline internally.

Finally, planning for the future helps you identify growth opportunities for your company. You will develop a roadmap for how to staff your company as it gets bigger and new roles open up. Easing the path to growth can increase a company’s value and helps leaders grow the business.

How to Develop a Small Business Succession Plan

One of the biggest obstacles to implementing an effective succession plan is not knowing when or where to start.

The best time to start is now. Unexpected events happen all the time, and there is no guarantee you have the time to put off succession planning. Further, planning for the future can provide short-term benefits your company can capitalize on now.

Companies can use several small business succession planning strategies to start the planning process. Developing a solid plan will help you implement it when the time comes.

Understand Your Options

Before developing a plan, it is important to understand what options are available. Successors for leadership positions can be found internally or externally. Finding internal candidates can boost morale and increase employee engagement with the company. External candidates can bring in outside industry knowledge and provide a fresh perspective. Choosing the right path for a given position depends on your company’s needs.

Another option for succession planning is to have a strategy to sell the company when the time comes.

Identify Successors

Identifying successors is sometimes the most challenging aspect of succession planning. Whether your company has too many great candidates to narrow down or lacks the talent the business needs, finding successors often involves difficult choices.

A strong candidate must be passionate about the business. They should also possess strong management skills and have the ability to learn what is necessary to fulfill the job requirements successfully. If there are no candidates internally, analyze the job market and understand the costs and delays associated with hiring a new candidate.

If the plan is to sell the business, identify potential buyers before the time comes. Get a firm understanding of your company’s value and how the process of selling the business might play out.

Draft a Plan

Writing it down will help others understand and implement the company’s succession plan. A solid draft should do the following:

  • Identify the key responsibilities of the role or roles being planned for,
  • Identify the business’s core mission and critical challenges,
  • Explain the process for finding and selecting potential candidates,
  • Implement a training program for candidates, and
  • Leave room for future growth and changes to the plan.

Drafting a plan will also help focus your ideas and identify aspects of the plan that might not work. An experienced business attorney at Batson Nolan can help you draft an effective succession plan.

Legal Considerations in Small Business Succession Planning

Understanding the legal considerations that should go into a solid succession plan is vital.

Legally Binding

Business owners must make their succession plan legally binding to avoid any disputes once they leave. They must also ensure that their plan accounts for the rules in the business’s articles of incorporation or corporate charter. You should even make the benefits the company must pay the previous owner legally binding to avoid disputes, as legal disputes during a major leadership change can destroy a business.

Fulfill Contracts

Further, a strong succession plan will ensure that employment contracts and client relationships are honored. In the plan, you should specify that the company will fulfill any binding deals and contracts.

Adhere to the Law

Finally, every succession plan must account for local, state, and federal laws and regulations. Issues regarding licensing, compliance, and taxes are commonly triggered when significant leadership and ownership changes occur.

An experienced attorney can help businesses plan for any potential land mines that might arise when executing a succession plan.

Communication and Family Dynamics in Small Business Succession Planning

Many small business succession plans involve close family members and complicated family dynamics. Clear and unwavering communication is critical when a family is involved. Business owners should clearly communicate their goals to any affected family members and take steps to make their decisions legally binding.

It is also essential to fully understand the tax implications of transferring the ownership of a business to a family member. Poor tax planning can put a company out of business, and a failing business is nothing but a burden to the person taking over.

Implementing the Small Business Succession Plan

Think about the potential timing to implement your business’s succession plan before it is absolutely necessary. Once implementation starts, following through as much as possible is often best. Starting the succession process and then abruptly stopping it can cause hard feelings and hurt your business. Many small business owners fall into a trap where they remain half in and half out of the company. Doing so causes confusion and often hurts operations.

When moving forward with your succession plan, ensuring that all critical knowledge is passed down to your successor is essential. In the short run, they might be able to rely on you to remind them of important details, but there is no guarantee you will be around to help in the long run.

While sticking with the decision is essential, being able to respond to unexpected circumstances is also necessary. Even well-planned successions can add an element of chaos to a business’s operations. Remaining flexible and able to respond to a dynamic situation is critical.

Batson Nolan PLC Is Here to Help

Succession planning is a necessary precaution for every small business. Creating a detailed plan reduces risk and provides many benefits. At Batson Nolan, our experienced attorneys stand ready to help business owners implement effective succession plans. We can advise on small business succession planning best practices and ensure the plan accounts for all your future needs. If your business does not have a succession plan in place, now is the time to start. Contact Batson Nolan today!