Thinking about stepping away from your business can be emotional. Planning to pass it along (or sell it outright) can be stressful. As a result, many small business owners table this decision indefinitely—in fact, more than half of today's small- and medium-sized businesses do not have a succession plan in place.1 And the absence of such a plan can ultimately present problems as the business stumbles forward without a strategy.2
The first stage of planning for transition is simply accepting that such plans need to be formalized. Once that's done, use this checklist to help address the next steps.
1. Consider your top priority
A survey of small business owners found that 41 percent list "future success of the business" as their top priority when transitioning their business. The same number said "getting the best price" is the main goal.3 There can be a big difference between the two: Do you hope your business will continue under your family's leadership for years to come, or are you looking to sell your business to fund a comfortable retirement? The answer may help inform how you'll plan your exit.
2. Picture your retirement
Will your retirement consist of traveling, spending time with family, volunteering (or a combination)? Do you want to spend some time working or consulting with your successors? You and your potential successors should have a clear idea of your planned involvement (or lack thereof) long before you officially hand over the reins.
3. Plan your timetable
To ensure a smooth transition, business owners should prepare at least three years in advance. A longer time horizon may be necessary if a family member or employee will be coming on to run the business. If you choose a successor just weeks or even months before you depart, you won't have sufficient time to transfer the knowledge needed to set him or her up for success.
4. Establish dates for key milestones
Once you've thought about when your transition may take place, consider when you will address three important items. First, you'll determine whether to transfer ownership to an employee or family member or pursue a sale. Next, you'll need to calculate your business's fair market value with the help of your accountant. (Note: The Median Sales Price for businesses sold in the third quarter of 2015 was $185,000; the Median Asking Price was $200,000.4) Finally, you should create a contingency plan for transition that can be activated quickly in the event of an emergency.
5. Revisit your plan as needed
Although you don't want to have one foot out the door if you have years of business leadership ahead of you, your succession plan should always be top of mind and adjusted as goals change and situations evolve. Work with your financial advisors to help you remain on the right track for an effective and successful transition.