How to take charge of your small business’ future by creating a smart succession plan

This story previously appeared on principal.com.

Transitions and change are hard — especially for small business owners. It can be tough to wrap your head around leaving something you created, and even harder if multiple people may be interested in taking over.

Business succession is one of the top priorities for business owners, according to the 2023 Principal^® Business Owner Insights survey¹. Yet 39% of these business owners lack a succession plan. And 21% of those who do have a plan haven’t reviewed it in more than two years.

“Often the hardest part is the emotional aspect,” says Patti Bell, assistant vice president of advanced solutions for Principal^®. “If you’ve dedicated much of your life to your business and it’s part of your identity, it can be really hard to walk away.”

It doesn’t have to be that way. A thoughtful, thorough succession plan benefits you — helping you figure out retirement income, for example. But it’s also good for whoever’s taking over by giving them time to figure out how to keep business growing.

Here are six key steps to creating your succession plan.

Step 1: Put a date on the calendar

“Someday” isn’t good enough, even if you’re reluctant to give up work that’s intertwined with your identity.

“If you’re the sole owner, it’s not too soon to start thinking about it in your 50s,” Bell says. “That way you give yourself about a decade to develop and implement your plan. If you have co-owners, you’ll want to start even earlier.”

Step 2: Establish the value of your business

An informal business valuation is an estimate based on an analysis of the company’s financial position. There are a few ways to create it:

Asset based, which compares assets to liabilities or net cash value of everything if it were sold.
Income based, which looks at past earnings and makes a reasonable assumption about future projections.
Market value, which looks at similar businesses and recent sales.

Even if you have no immediate plans to sell, a business valuation is something you can and should update regularly. It allows you to project how much life insurance you might want for business purposes to help protect your family against future loss, for one thing.

Step 3: Figure out who wants the business

Although family-owned businesses may offer a natural succession starting point, just because you don’t have a family doesn’t mean you can’t find a buyer. “People typically transition out in one of three ways: sell it, give it to someone in their family, or keep ownership but groom others to run it,” Bell says.

For the latter choice, key employees offer one option; owners of the competition may be another. If you don’t have someone in mind, a financial professional can help you identify possibilities.

When it comes to successfully transitioning to a family member, such as a child, Bell says, “think of them not as your child but as a person who’s going to run your business. Do they make good decisions? Are they effective at communicating? Are they visible and impactful in the community? And do they care about employees like you do?”

Step 4: Hire experts to help you

You’re going to need help from tax, legal, and financial professionals to create a business succession strategy. Working with an experienced team may help you accomplish a successful transition.

Step 5: Choose the type of succession strategy

Who takes over your business (and if you’re related to them) may influence whether you sell, gift, or try a combination of the two. The sale type should also accommodate continuity planning. “Many people haven’t thought about what’s going to happen if there’s an event like bankruptcy or a divorce, and what’s the road map if those events occur,” Bell says.

Step 6: Do what you can to retain valued employees

Every step of succession planning helps you ensure the new owner doesn’t inherit a management team or staff riddled by departures. Retention or incentive plans linked to a required service period or specific date following the sale could help ensure a smooth transition. And life insurance for the business owner could help protect those promises made to key employees.

“Keep checking in with your succession plan, especially with key employees, to make sure everyone’s head is in the same place and nothing big has changed,” Bell says. “What made sense when you created the plan may not make sense when you’re closing in on retirement.”

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This post was created by Principal with Insider Studios.

¹More than 1,000 businesses polled, each with fewer than 500 employees, January 2023.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Company^®. Plan administrative services offered by Principal Life Insurance Company®. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group^®, Des Moines, IA 50392.

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