Small businesses serve as the backbone of the economy. If you run a family business, you understand the importance of succession planning and openly communicating with those who are slated to take the reins one day.
Family businesses account for 64 percent of the US gross domestic product, yet 43 percent of family businesses have no formal succession plan. With the day-to-day demand business owners experience, it’s no surprise that succession planning tends to get put on the back burner. Nevertheless, neglecting to focus on succession planning can put business owners and their family members at risk.
Why Is Business Succession Planning Important?
There are several reasons for business owners to consider a business succession structure sooner rather than later. Let’s look at two of them.
The first reason is taxes. Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them. Failure to properly prepare can also lead to a loss of control over the final disposition of the company. Second, the absence of a succession structure may result in a decline in the value of the business in the event of the owner’s death or an unexpected disability.
Business Succession Planning Tips
- It’s Never Too Early to Begin Planning. The sooner you begin preparing your business succession plan, the sooner you can begin implementing the details. You may have been advised to build an exit strategy directly into your business plan, which is beneficial in the long run. The more time you can spend on succession planning, the smoother the transition process will likely be.
- Train Your Successors. You’re more likely to achieve success with your transition plan by working with your successors for an ample amount of time before you hand over full responsibility. Beyond the day-to-day, also consider involving your successors in strategic planning and decision-making five or ten years out. While it may be difficult to give up some control while you are still very much “in charge,” allowing your successors to be a key part of strategic initiatives will greatly improve their ability to continue to handle this after your exit.
- Acquire Outside Help. A variety of professionals, including lawyers, accountants, financial advisors, etc., can help you organize and develop a successful succession plan. With their expertise, you may find yourself analyzing options and considering details that you wouldn’t have thought of otherwise. By partnering with professionals who specifically specialize in family business succession planning, you'll get the added benefit of having someone who is able to facilitate the process of working through potential issues.
The Business Succession Process
The process of business succession is comprised of three basic steps:
- Identify your goals. When you know your objectives, it becomes easier to develop a plan to achieve them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
- Determine steps to pursue your objectives. There are several options that can help you follow the goals you’ve identified, and they include using buy/sell agreements, gifting shares, establishing a variety of trusts, or even creating an employee stock ownership plan if your desire is that employees have an ownership stake in the future.
- Implement the strategy. The execution step converts ideas into action. Once it’s implemented, you should revisit the strategy regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.
Keep in mind that a fundamental prerequisite to business succession is valuing your business.
As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession plan, consider working with legal and tax professionals who are familiar with the process.