5 Steps Los Angeles Business Owners should take to develop a Succession Plan

5 Steps Los Angeles Business Owners should take to develop a Succession Plan

The events of the past two years have caused many business owners in Los Angeles and around the country, both large and small, to consider creating a succession plan. 

Succession planning for business owners in LA and other large metropolitan areas can be complicated due to the challenges of running a business in these locations. With rents in these areas high and reduced foot traffic due to pandemic-related government mandates and an increase in people working from home, the complexity of managing a business has risen significantly in many cases, especially in big cities. 

While the move towards remote work has been applauded by many employees for the flexibility it brings, it also comes with management challenges. In addition to potentially leading to higher turnover as employees working from home can offer their services to a wider range of companies, it can also make it more difficult to supervise employees.

How Do I Create a Succession Plan?

Whether you are looking to step away, either fully or partially, from the responsibility of managing your business, either right away or sometime down the road, succession planning is essential to ensure a smooth transition.  

A succession plan should outline a strategy for your exit as a business owner from running your company full-time. This could involve identifying and promoting leaders from within or without the business and training them to fill your shoes when the time comes. It could also involve the sale of part or all of the business. 

Succession planning for business owners is useful in both cases, because in the case of a sale, the new buyer may want to utilize the skills of existing management to help them run the business. If you are not staying on in this capacity, having staff ready to take over the role can help reassure the new owners that the transition process will go well.  

Whether you are looking to draw up a succession plan for the first time or revise an existing plan, consulting a CERTIFIED FINANCIAL PLANNER™  can help you thoroughly evaluate all your options. A CFP® has the training and experience to help you, along with your professional team which may include your CPA, attorney, etc., weigh the short and long-term impact of various succession plan strategies on your financial future.

The following five steps can help you develop a succession plan:

#1: Determine Your Preferred Exit Strategy

A succession plan is based on your life goals – do you want to retain ownership of your business, at least to a degree, while having others run it when you are ready to retire or work less? Would you prefer to sell the business instead? 

While these may seem like widely different options, both approaches can benefit from establishing a clear line of succession. As mentioned above, some buyers may prefer to allow existing management to continue to run the business – having a clear line of succession can help you close a deal in such cases. 

By the same token, putting into place a succession plan that can help ensure your business will run smoothly once you retire or spend less time at work can also improve your negotiating position if you receive an unsolicited offer for your business. If you feel confident that the business will run well without you, you can demand that a buyer pay a premium price. 

#2: Prepare Your Plan 

Once you have decided on your ultimate goal, it’s a good idea to consider a backup plan. What would you do if you can’t get the price you want for your business? Would you keep it and promote someone to run it? Lower your price? What if you decide to select others to run the business for you while maintaining ultimate control but find this approach is not productive or takes more of your time than you might like?   

Given the significance of the decision, having a backup plan is crucial to improving the chances that your transition away from the business goes as smoothly as possible. A CFP® along with an CPA and attorney, can help you in this process by running the numbers on the different options available to you. While your ultimate decision should include both quality of life and financial considerations, the experience of a CFP® can help you pinpoint the financial repercussions of different options. For instance, is selling the business and taking the tax hit upfront the best approach or would a strategy involving graduated payments over time be better?

Once you’ve decided on your goals, the first step to putting your plan into action is writing it down. Whether you use paper or a computer or another digital device, recording your action plan in writing demonstrates a level of commitment that is important to make the plan a reality. 

#3: Plan for a Successor

When looking for someone to take over the running of the business, it is often important to spread your net wide – don’t just look at internal candidates unless you are sure you have the right person already on staff. Additionally, depending on the size of your business, it may be more productive to train a team of people who can fill your role, rather than just a single candidate. This approach enables you to select the best person for the job based on their performance in comparison with other candidates.

This is a key part of a succession strategy because it can be hard to pinpoint exactly when you will leave or step back from the company. You may be able to plan it out years in advance, or it may happen suddenly, for instance, as a result of poor health or an unsolicited purchase offer. If you have a plan in place, you will be ready for such events with a leadership team qualified to step in and get the job done. 

#4: Try a Succession Plan Test Run

One way to help your succession plan succeed is to embark on a trial run. This enables you to see in advance how key employees do in various managerial roles well before they may need to assume them. Your staff can gain valuable experience in managerial skills while you assess their performance and see where improvements can be made.

The most important role to fill, of course, is your own as owner and manager of the business. For this reason, giving your likely or selected replacement the chance to show what they can do in your absence is vital to preparing them to take over the role. In addition to a test run, you may want to gradually give your likely successor or successors increasing responsibility over time. This allows you to provide ongoing advice while also enabling you to gauge their performance to ensure they are right for the role.

#5: Plan for a Sale

If your preferred exit strategy is to sell your business, or if you just want to be ready to consider any offers you might receive, planning in advance for a sale can help you get the best price possible for your business. 

There are a number of issues to consider when planning a sale:

Have you already identified a buyer for your business, or will you need to put the business up for sale? Do you plan to sell the whole company at one time or in stages, and do you plan to stay involved with the business post-sale (subject to agreement with the buyer)? 

There are also after-deal considerations to take into account for financial planning purposes. Do you want to take payment in a lump sum or over time? What are your future plans, do you have other business ventures you’d like to pursue, travel plans, hobbies? 

Steps to take when planning to sell your business include:

  • Value the business: For this task, working with an individual or firm with experience in the field is essential. When the valuation is ready, you can incorporate the results in your overall financial planning. This analysis can help inform your decision to take all or a large part of the purchase amount upfront or to stretch it out over time.  
  • Choose a transaction structure: This is a crucial aspect of the sales process. Selecting the transaction structure that works best for you is vital not only to maximize the amount you ultimately receive from a transaction but also for lifestyle reasons. If you’d like to continue working at your company in some role the deal terms should specify this. You should consult with your financial planner, CPA, and legal advisors over the terms of the deal with regard to tax consequences. 

Finally, remember that adaptability and routine plan maintenance is the key to ensuring your plan is successful, and hiring an experienced CFP® will help you keep it that way. For more information on how to create a succession plan aligned to your needs, reach out to us for a complimentary consultation and let us answer your questions. 


More About the Author: Randy Takaki

Prior to founding TAKWEALTH, Randy Takaki graduated from the University of California, San Diego with a B.S. in Artificial Intelligence. He then spent over a decade as a senior advisor and AI contributor in the data-driven world of asset management. Randy’s main goal for TAKWEALTH clients is to build trust by creating a foundation that reliably and uniquely manages a client’s assets to meet their life goals. When Randy is not working hard for clients at TAKWEALTH, you can find him exploring the outdoors or planning his next computer science project.