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Small businesses are the backbone of economies worldwide, contributing significantly to employment and innovation. However, many small business owners overlook a critical aspect of their long-term sustainability: continuity and succession planning. In this blog post, we’ll delve into the importance of these processes and how they can safeguard the future of your business.
Understanding Continuity and Succession Planning
Continuity planning involves identifying potential risks and creating strategies to ensure business operations can continue in the face of challenges such as natural disasters, economic downturns, or unexpected events like the illness of a key employee. On the other hand, succession planning focuses on preparing for the transfer of leadership and ownership when the current owner or key stakeholders step down or retire.
You’ve worked hard to build a successful business by putting in the time, energy, blood, sweat, and tears. And not just yours… likely, your entire family has sacrificed to make your company what it is today. In return, it’s provided income, a lifestyle, and a legacy for all your hard work. Businesses like yours are the backbone of the American economy, and you should be proud of what you’ve built. And just like you’ve always attended to your customers, now is the time to attend to your business by engaging in proper planning.
Business Continuity Plan (BCP)
Life is unpredictable. That’s why it’s essential to have a documented Business Continuity Plan (BCP) in place to help your company stay afloat during unexpected times of crisis. This is especially true for small business owners. They frequently lack the time and resources to create a formal BCP, yet they are often the most significantly impacted in times of crisis.
Continuity plans lay out the critical elements for keeping your business operating under abnormal circumstances. For example:
- How and where is your business data backed up?
- How will you communicate with clients and customers?
- Is there an alternate business location if your building is destroyed?
- Do you have an inventory of all your supplies and equipment?
There is SO much more to consider.
If you don’t yet have a BCP, we can help. Attached is an in-depth, step-by-step guide for planning how you’ll navigate and recover from an unexpected event. A BCP forces you to take the necessary steps to ensure your business can function properly during any crisis by anticipating your company’s needs and identifying and fixing any weaknesses.
Know The Value of Your Business
Now that we have covered the importance of having a business continuity plan, Let’s discuss the importance of knowing the value of your business. The process of figuring out what your business is worth can be more complicated than expected. As a business owner, the amount of time and energy you’ve put into building a successful company is invaluable. But the value you need to consider is what someone else would pay for your business.
Often, the best person to help you obtain a precise estimate is an accountant, a trained business appraiser, or a licensed business broker. Here are a few approaches they may consider.
1.) The Cost Approach evaluates your assets and liabilities to determine the net worth of your business. Within this approach, there are three possible valuations:
- Book value represents the value of the underlying assets that the business owns, minus liabilities.
- Adjusted book value looks at the same assets and liabilities as book value, but also considers the value of other tangible and intangible assets (property, equipment, patents, copyrights, client lists, trade contracts, etc.)
- Liquidation value refers to what would be left if the business stopped operating, sold its assets, and paid off its liabilities.
2.) The Income Approach assumes your business earnings are the best indicator of value. Here, there are two main methods:
- Capitalization of earnings method determines the average earnings of your business over a particular time period, then divides the amount by an industry-accepted capitalization rate. This method is generally used for companies with a stable earnings history and predictable future cash flows.
- Discounted cash flow method attempts to estimate the future earnings of the company, then discounts them back to the present to determine the company’s value.
3.) The Market Approach attempts to determine the value of a business by comparing the company to similar enterprises that have recently sold. Adjustments can be made to account for differences in size, risk, market position, and other factors.
We know this is a lot to think about, but different valuation methods may produce different results. So, it’s essential to understand all the possibilities and which approach may make the most sense for your business or industry.
Buy/Sell Agreements
When discussing the complexities of business continuity planning, the buy/sell agreement may be the most critical topic. A buy/sell agreement is designed to help guarantee a reward for you and your family when an owner exits the business. A buy/sell agreement is a contract between business owners, ensuring some value in the company even if something personally happens to one party: divorce, death, disability, etc. An adequately designed agreement creates a mechanism to buy out another owner’s interest in the business, establishes the price, and can even provide the cash that surviving owners will use for the buyout.
There are three basic types of buy-sell agreements:
- A redemption buy-sell agreement: The business entity as a whole agrees to purchase the interests of departing owners.
- A cross-purchase agreement: The individual owners themselves agree to purchase the interests of departing owners.
- A “wait and see” buy-sell agreement: A hybrid of the previous two agreements, this option provides flexibility about who the buyer might be (it could be the entity, the other owners, or both).
These agreements can be funded in various ways, including savings from the business (a sinking fund), a loan, or by setting up a life or disability insurance policy
Succession Planning
Business Continuity Plans are complex and encompass many essential components. In addition to understanding the value of your business and the necessity of having a plan for how your business will look after you step down, it’s important to find someone you trust to take over for you. This can be a huge decision, especially if you’ve built a name for yourself in the marketplace – it could be your reputation on the line! Even if you don’t plan to leave your business for many years, identifying potential successors now can be very beneficial, especially if you’re running a family company.
So, let’s think about the following:
- Is there someone in your family who can lead the business based on age, temperament, experience, and skills?
- Are they interested in the business and willing to take over?
- Do you trust them to continue to run and build the business successfully?
If you can answer “yes” to all the above questions, keeping your business in the family may be an option. But if the honest answer to any of these questions is “no,” then it may be better to sell your business to outsiders.
Who are the potential buyers if you plan to sell outside the family? Do you have co-owners? Is there a key employee, or even a group of employees, who would be interested in buying the business? Are there competitors who may want to grow their business by purchasing yours? It’s worth it to think about these questions now so you can begin cultivating the necessary experience among family members or build relationships with outside contacts.
In Conclusion
Continuity and succession planning are essential components of responsible business management, particularly for small business owners. By proactively addressing potential risks and preparing for leadership transitions, you can protect the legacy of your business and ensure its long-term success. Invest the time and resources needed to develop robust plans that will safeguard your business for years to come.
If you’d like to be partnered with a financial resource who cares about and understands your business, let’s connect! We have a passion for helping business owners like you, and we’d love to discuss creating a custom plan targeting you and your business’s long-term financial success.
**The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
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