The last thing any entrepreneur wants to think about is leaving the business, especially during the start-up phase. It is common for new business owners to focus all of their energy on making it through that first year, future profits, and simply see themselves working into eternity. The reality is that the unexpected could force the end and you should be prepared to transfer your ownership.
Even if you don’t decide to sell your shares, other factors, including health reasons, retirement, or death could mean the natural end of your engagement. It is important to plan ahead for how your business will operate when you are gone. A business succession plan is essentially an exit strategy that will help your business transition smoothly to a new owner or your remaining partners.
Planning for Dissolution
Every business is unique, and so is every exit plan. Your business is also likely to evolve over the course of a business lifespan so even your succession plans could change. You may want to go public or hand your business over to a son or daughter. Regardless of how you envision your exit, even if you don’t see an end at all, it is important to plan for succession. Start with your own goals, work with other stakeholders, and explore your options to come up with a successful plan.
Succession Planning Tools
Business succession planning has different routes. You can gift your shares to family members, established trusts to provide continued income, or simply leave your stock to the next generation. You can also sell your shares to managers or employees. Buy-sell agreements can also be arranged between or among business owners to secure a solid ownership between a small number of shareholders. Management buyouts secure continued management but provide liquidity and a reduction of personal responsibility in the event of death or incapacitation.
Liquidation and sale of business shares to outsiders are not usually in the scope of succession planning; however, they are options. This is what happens when your successors are not in your family or already in the company. Under certain circumstances, liquidation is the easiest way for former business owners to meet financial needs while eliminating ties with a company.
Retirement for Owners
If you were working as an employee for another company, you would likely have a 401k and other retirement plans and options. As with any career employee, you should invest in your own retirement plan. This includes life insurance, personal disability, and other investments that can protect you and your family in the event that you are forced to step away from your ownership role. For many sole proprietors, an IRA is the best retirement solution. Small business owners with employees can also set up retirement plans with the benefit of tax deductions.
Family Owned Businesses
If you are a family business owner, planning for the generational transition of your family business is critical to surviving a second or third generation. You will need to align the interest of your current family and owners while turning over the responsibility to the next generation while also providing for retirement income. You will also need to balance financial returns and create buyout agreements, which can get complicated. Proper succession planning can also prevent future disputes between family members. Other issues may involve a surviving spouse that holds stock and has voting rights but is not involved in the business.
Advanced Tax Planning
Hardworking business owners want to minimize their tax obligations throughout the life of their company and in transition. One of the key benefits of business succession planning is the ability to mitigate your tax obligations at the time of death or when handing over your share of a business. If no plan is in place, a business owner could end up turning over a large portion of the value of a business to the government, leaving little for surviving family members. A succession plan can reduce or even eliminate taxes and insure that family members and employees collect what they deserve when estate taxes are assessed.
Identify goals and explore your options
The first step in creating a successful and effective business succession plan is identifying your goals. Do you want to liquidate a business, transfer your shares, or transition to new ownership? How do you foresee the future of your business when you are no longer able to participate in day-to-day operations? How much responsibility do you want to handover to your spouse or children? Do your spouse and children want to have a role in your business or would they rather get cash? It is important to sit down with your partners and your family members to create a feasible business succession plan. Whether you are concerned about maintaining employment and income for family members and colleagues or establishing a legacy through business or charity, a succession plan can help you accomplish your goals.
Manage expectations and relationships
Even though mortality, injury, or a forced exit can be unpleasant to talk about, you should discuss succession planning options with your partners and family members. Managing expectations and dealing with the delicate relationships could prevent future disputes and make sure everyone is on the same page. You may have family members who are partial owners, family members who are employees, or owners who are also managers or employees. Each of these individuals is going to be concerned with the direction of the business and has a stake in the succession plan. It can help to discuss prospects before proceeding with your plan to prevent conflict and to set realistic expectations.
Risks of failing to create a succession plan.
The longer you delay the plans, the fewer options you will have. Failure to create a plan could leave your business in the hands of the government, attorneys, or in litigation between partners and family members. The total value of a business can also drop when a business owner dies or becomes incapacitated. To protect your family members, the future success of your business, as well as your legacy, creating a business succession plan is critical. Even if you plan to liquidate or sell the business once you are no longer able to participate, everyone will benefit from knowing your intentions.