In this segment of our Planning Matters series, we explore business succession planning for female entrepreneurs and highlight the four key components of an effective long-term succession plan.
Women in America started new businesses at the rate of about 1,800 per day during 2018–19, according to the State of Women-Owned Businesses Report, compiled by American Express. That’s encouraging news. However, because starting a business is so exciting, most female founders do not stop to think about the scary “what-if” curveballs that life can throw, and specifically what that would mean for their business. A recent study showed that 58% of business owners lack a succession plan, which includes 47% of owners over the age of 65.
Short-Term Substitute Planning
Female entrepreneurs face unique challenges because they are more likely than their male peers to step away from business for personal and familial reasons. This could include anything from birth of a new child, a personal or family illness, to a sabbatical or educational leave. In a study conducted by the Harvard Business Review, female business owners were 15% more likely to exit their business for personal reasons (and their probability for failure was reduced by 13%!). Instead of permanently stepping away from your leadership position, consider if there is anyone in your organization who could step in to help out with the day-to-day if you needed to take an extended leave (typically between 3 and 12 months).
Long-Term Succession Planning
In the event of retirement or permanent departure, you want to ensure that your business will not skip a beat. Additionally, it will give you the chance to select your successor, by selling your organization to a third party or to promising female talent in your organization if it’s important for it to continue as a female-owned business. Selecting a successor ahead of time, ideally at business inception, gives you the ability to help shape the future of your organization if you suddenly or expectedly step away from the business permanently. Below we have highlighted the top components of an effective long-term succession plan.
1. Explore All Options
There are many different avenues you can explore when thinking about whom to transition your business to. The most common transitions include selling to a co-owner, a key employee, or a third party, or passing ownership interest to a family member. When choosing which route to take, evaluate if and how soon you will need the capital, whether this was included in your retirement planning, and the capability of your chosen successor to execute on the purchase agreement. Statistics show that approximately 75% of all businesses fail to survive past the first generation of owners, mainly because succession plan options have not been fully explored.
2. Choose a Successor
If you plan to step away from work for a short period of time, your substitute may need to fill a different role than the person you would choose for a longer-term solution. While you may be inclined to choose someone who you get along with as a permanent successor, make sure that you select the individual based on the needs of the business as a whole and take into consideration what deficits will be created by your ultimate departure. Consider their depth of experience, evaluate their strengths and weaknesses, and invest time in training and preparing them for their future leadership position.
3. Proper Documentation
Over 30% of business owners are not sure what their business is worth. While you do not need to have a specific valuation determined, you should have a pretty good idea as to what your business could potentially sell for. Whether it be creating an agreed-upon sale multiple internally or planning to hire a CPA to appraise your business at the time of sale, it is best practice to have a legal document detailing the specifics of the future succession. Plan to have proper documentation signed with your successor so you are both on the same page. If you are looking for more information on how to value your business, this article is a great resource.
4. Open Communication
It is important to talk honestly and often with your successor to make sure that you continue to have shared assumptions and understandings. A succession plan is not necessarily a one-and-done document, because your plans and expectations and those of your successor may change in the future. To mitigate any future misunderstandings or miscommunications, have recurring check-ins annually with each other to keep the communication channel open. Additionally, you should start to work with your successor to create your exit path 3 to 5 years ahead of your expected departure. While most business owners love running their business and cannot imagine stepping away, if you wait too long to plan for succession, you may not meet your financial goals and may be opening yourself up to unnecessary risk.
If you are a female founder or business owner and are ready to start planning your own succession, please contact our team today.
