Workplace

Every business owner will one day face the daunting task of picking a successor for his or her company. And this choice can mean the difference between a business' success or failure.

To avoid leaving your company without clear leadership, now is a good time to identify and select your company's next generation of leaders. However, consider some important factors as you do so.

Set exit objectives

To begin establishing a succession plan, you first should consider the three W's: when, what and who.

First, when do you want to leave your company? Pressures from the stock market and economy have changed many retirees' plans, and retiring too soon may force you to adjust your lifestyle significantly.

Plan to have enough income to support your lifestyle for at least 30 years after you retire. Some Web sites can help you calculate this amount, but a rule of thumb is $250,000 of assets invested at 6 percent for every $10,000 of annual income needed.

Also, what will be the terms of your departure? For example, will you be allowed to work on a consultant basis after you leave? And who will pay for the company perks you had? Work benefits, such as cell phones, travel, automobiles and other expenses, often are taken for granted, and you'll need to be prepared to pick up those costs following your departure.

And who will run the company? This issue can be more complicated with family-owned businesses. The closer a family is and the more family members who work in a business, the harder this decision becomes. The oldest family member often is assumed to be the successor but may not always be the best choice.

An independent review of the candidates by a close but impartial associate may offer an easier way to select your successor.

Determine value

The best price for a company is one on which a buyer and seller can agree. A business appraisal can cost thousands of dollars, but it may be necessary if typical negotiations fail.

Most buyouts are based on multiple earnings or assets depending on the company's nature. A well-established roofing company with a significant amount of recurring revenue is worth more than one that is relatively new with most of its revenue coming from new customers.

Converting to cash

Selling your business for cash is the obvious best option but may not be in the cards for a potential buyer.

If a sale is within a company to an existing employee or family member, the only source of revenue for payments is the departing owners' salary or an increase in sales.

Borrowing enough money to fund a purchase also may pose a problem for a buyer in the current credit market. Try looking into seller financing, deferred stock sales or an employee stock ownership plan to help make repayments easier for a potential buyer.

Contingency plan

What happens if a buyer can't make the payments and you are forced to take back the company? Do you have enough knowledge to come back? Have your customers remained loyal, or have they left the company? Will your management team remain to help you, or did the buyer run them off to a competitor?

All these issues can make retirement a nightmare if you have not planned properly. Prepare a written contingency plan and maintain cash reserves to put back into the business until you have all your money and are free from the responsibility of coming back into the business once you leave.

Success

The most important part of a succession plan lies in the word "success." Finding capable and effective people to help you plan is an important part of the process.

Brian Heckert is president of PENFlex Services Inc., a business consulting firm with offices in Nashville, Ill., and Peoria, Ill.