When it comes to business succession planning, several different types of plans can be put into place depending on the needs and goals of the business owner. Each type of plan has its unique advantages and disadvantages.
Below we have mentioned the five most common types of business succession plans.
Family Succession Plan
A family succession plan is one of the most common business succession plans. As the name suggests, this plan involves transferring ownership and leadership of the business to a family member or members.
This can be an attractive option for business owners who want to keep the business in the family and ensure it remains a part of their legacy. You should know that family succession plans can also be complex and challenging.
Family dynamics can be difficult to navigate, and ensuring that the successor has the skills and experience necessary to run the business successfully can be challenging. Additionally, family members not involved in the business may feel left out or resentful of the decision.
Management Buyout Plan
A management buyout plan involves selling the business to one or more key employees already involved in the company’s management. This can be an attractive option for business owners who want to ensure that the business remains in capable hands after they retire or leave the company.
Management buyout plan can be easier to transition the business to someone with experience and knowledge of the company. Additionally, the current owner may be able to negotiate a higher purchase price for the business than they could get on the open market.
On the other hand, a management buyout plan can also be challenging. Key employees may not have the financial resources to purchase the business, and financing can be difficult to secure. Additionally, the management team may have conflicts of interest or disagreements during the transition process.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan (ESOP) is a type of plan in which employees are allowed to purchase company shares over time. This can be an attractive option for business owners who want to reward employees and incentivize them to stay with the company.
An advantage of an ESOP is that it can help to ensure that the company remains independent and does not get acquired by a larger competitor. Additionally, employees who own shares in the company may be more motivated and invested in the business’s success.
However, an ESOP can also be complex and expensive to set up. Additionally, employees may not have the financial resources to purchase shares, and the value of the shares can fluctuate over time.
Sale to a Third Party
A sale to a third party is another common type of business succession plan. This involves selling the business to an outside buyer, such as a competitor, investor, or private equity firm.
One advantage of this type of plan is that it can be easier to negotiate a high purchase price for the business. Additionally, the current owner may be able to retain a role in the company or stay involved in an advisory capacity. However, selling to a third party can also be challenging.
The current owner may not control the company’s future direction, and conflicts of interest may arise during the transition process. Additionally, employees may be concerned about their job security or the company’s future.
A liquidation plan involves selling the business’s assets and closing the company. This can be an attractive option for business owners who are ready to retire and do not want to deal with the complexities of transferring ownership and leadership to another party.
One advantage of a liquidation plan is that it can be a relatively simple process. Additionally, the current owner can maximize the value of the business by selling off assets individually.