If you own a small business, developing a succession plan should be a critical element of your strategic planning. Unfortunately, many business owners fail to appreciate the complexities and time involved in successfully transitioning a business from one generation or group to another. Entangled in the day-to-day management of their companies, business owners often neglect succession planning to their detriment.

Transitions in business entities are usually triggered by retirement, sudden illness, mental incapacity, death or some other major life event. Failure to plan for that inevitable day puts at risk the survival of a business. For example, death or disability could disrupt your company's key systems if other individuals lack the knowledge or experience to lead the company in the absence of its original owners and managers. Additionally, as those in leadership age, they must consider whether they have sufficiently funded their retirement accounts so as to sustain them after they stop working. A business succession plan addresses these issues by identifying and implementing the strategies necessary to successfully transfer leadership from one individual or group to another. By carefully crafting a business succession plan you can facilitate the preparation necessary to ensure a smooth transition of the company's management.

To develop a sound plan, you must consider your desired exit strategy. There are several options available. Some business owners decide to keep ownership and management within the family. This option is often selected when one desires to nurture specific family values over time. If this situation arises, a transitioning owner should explicitly teach these values and current leadership should diligently assess which family members have the ability and interest to lead the company in the future. Whereas decisions concerning a successor may affect internal family dynamics, the choice to transition in this way should not be made without careful deliberation.

In other instances, business owners may choose to pass leadership to a key employee who fully grasps the nature of the business. When a company's leadership opts for this transition strategy, it is important to determine what, if any, additional training and development the successor employee may need in order to usher the company into its next stage. Another important consideration is ensuring that the employee has the financial ability to purchase the business. As the current owner, you may have to assist the employee in securing the financing necessary to buy the business.

Another strategy is to sell the business to an unrelated third party. An objective external party may be able to make better decisions regarding the future of the business due to its unbiased point of view. It should be noted that challenges may arise between the successor and older employees who are not acclimated to the new leadership style. Although such tension could result in high turnover during the transition period, with proper preparation and support the new leadership and older staff should be able to successfully adapt to one another over time.

Finally, business owners can choose to pursue a hybrid option where management is turned over to a key employee while the family retains full or partial ownership. This strategy allows the family to maintain financial rights as well as top-level decision-making power, while preserving the most qualified candidates to manage the business.

Each of these options presents its own benefits and challenges and must be chosen well in advance. Early and careful analysis of the various options will allow owners the time needed to prepare their successors.

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