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SUCCESSION PLAN
It is critical to build a management team within the company that will allow for an orderly transfer of power if and when the founder leaves. Especially with smaller companies, the danger is that when the founder leaves, the business collapses. This is why smart buyers often arrange to ensure the owner stay involved in the company's management after the transaction -- and often has a financial stake in the company's continued success.
Business succession is a touchy subject because owners often shy from considering the inevitable time when they will no longer run their business. Owners find it all too easy to not have a plan. In fact, according to a study by Deloitte & Touche, only about 28% of family-owned businesses have a succession plan in place. Such is the effect of the entrepreneurial ego. (And this is why some business owners can't even get away for a brief vacation -- My company would fall apart without me.")
The existence of a sound succession plan goes a long way in instilling confidence in a potential buyer. It also adds an incredible amount of value to your company. Remember: Indispensability loses you valuation points. If you plan to sell your business some day, it is utterly essential that you build your team as the company grows so you're not absolutely indispensable.
The plan -- which, like a business plan, must be updated regularly -- should have the following elements:
Owner's goals. The owner defines what he wants: dividend income, for example, or the sale of all his interest. If he wants to remain on the board of directors, that should be specified.
Successor. Who will lead the business after the owner? If this person or people do not already have the necessary managerial abilities, a training regimen is imperative.
Estate plan. For the owner's sake, there should be an estate plan to minimize taxes.
Disability contingency. There must be a plan of action in case the founder is disabled. There also should be a key person insurance policy. (See the next section.)
Buy-sell agreement. This is another key element to eliminate confusion or conflicts. (See the following.)
