It’s not enough to start a business, grow it, and see it become successful – although that is a tremendous accomplishment! For the business to remain viable after a transition change, advanced succession planning for small business is recommended.
When it comes time to exit a business as an owner, the most common options include the following:
- Sell the company to an external buyer
- Sell the company/business to your partner(s)
- Sell the business to an employee(s)
- Transfer the business to one or more of your heirs
Today, many business owners who have put in a lifetime of work and effort into making the business successful would rather not sell the business but pass it on to their family members so that their legacy, and perhaps their name, lives on. Unfortunately, many business owners put off making a plan until they are ready to retire. Consider what would happen to your business if you suddenly became ill, disabled, or injured. Who would take over your business, and would it remain viable?
Without having concrete succession plans, passing over a family-run business is fraught with problems. First, transferring a family-run business to other family members requires a lot of work and effort. If the right successor is not selected, the business will go bankrupt in no time at all. Sometimes there is no obvious family successor to take over the business, and this means either selecting an external successor or selling the business.
Succession planning for a small business involves a legal process that helps guide the owner with step-by-step instructions on how to transfer ownership. If any type of financing is involved, the plan will include the purchase terms and sale price, which will relieve enormous stress for the departing owner. A well-thought-out succession plan is of benefit to all parties concerned, including the departing owner, the successor, the employees, and the survival of the business itself.
Surveys reveal that even though business owners know the importance of succession plans, most do not know how to start the process or when to begin. Despite the dearth of information on the internet about succession planning, much of the information is not easy to digest, and the potential cost of the process can also be scary. In reality, creating a succession plan is not that difficult as long as one consults with the right professional(s). Besides a lawyer, one may need to consult with a tax advisor and an accountant.
HOW DO YOU BEGIN A SUCCESSION PLAN?
- The best way to get some idea about what succession planning is all about is to read about it. There are many articles on the internet, and this will give you some idea of what is involved and the time factor.
- Next, ask other people with a similar business if they have made any plans for retirement or disability. This way, you will have some idea of how much the owners are prepared, how they are preparing, and what type of planning they have initiated.
- To know the realities of succession planning, speak to at least half a dozen former business owners who transferred their business to family members and may know about the issues that you may face. These individuals will be able to tell you both the positives and negatives of succession planning in family business.
- The next source of information should be vendors and customers of businesses. These individuals will be able to tell you the real facts about the business and how well it is doing and any concerns that may be prominent.
- Once you have some idea about succession planning for small business, you have to select an option. Do you want to sell your business? Keep it in the family? Have someone else run it for you? There is no right or wrong answer; it is all a matter of personal preference and the goals you have set for your business.
- If you decide to keep the business in the family, you need to start the succession planning process soon. The reason is that succession planning in family business requires time and can take a few months to a few years to reach completion. As well, it is a plan document that needs to be revisited annually so as to keep up with changes in the business, in the family, or in the tax laws.
- Get an independent valuation of your business. This will help you plan your retirement income strategy, purchase the right amount of insurance for protection planning, and adequately value the future owner’s shares. Valuation of the business can make it a lot simpler and easier for the potential buyer to obtain a loan or attract potential successors.
- You always need to consider how your business succession plan will be funded. Will it be funded via a life insurance plan, cash buyout, loan, or a seller’s guarantee note?
- Write down who will take over your business and how you and the heirs will be compensated.
- Consider making a buy-sell agreement: Most succession plans will include a buy-sell agreement that permits heirs not actively making business decisions to sell their shares to others in the company.
- Write down plans for the transition to new ownership. The handoff should be smooth if the business plan is thorough.
- If you do not plan to retire right away, review the succession plan and make changes accordingly. For example, one of the heirs may have died or is no longer interested in taking over the business. In addition, the business valuation may have changed. The review of the plan should be a formal process done with your accountant, tax advisor, and lawyer.
WHY IS SUCCESSION PLANNING IMPORTANT?
Whether you will be retiring in the next ten years or within six months or suddenly become disabled or ill, the continued success of your business depends on your plan’s strategy. Good and effective succession planning for small business can help with the following:
- Make the transfer of your business relatively easy when the time comes
- Will provide financial stability for you and your heirs
- Help maintain your lifestyle whether you are retired or seeking another career
- Will prepare the successor to handle most unanticipated events with confidence
Unfortunately, unplanned exits in business are very common due to many factors, including retirement, injury, disability, illness, or change in career. If you want your business legacy to continue, it is important you consider succession planning for small business. The more prepared you are, the fewer problems there will be when transferring ownership. It is important to seek assistance and advice from the right people as there are legal, financial, and tax implications involved. As well, there is a need for extensive documentation. The professional you select to help you with succession planning in family business will depend on the size of your business, the complexity of the business, and the number of employees. Call Elder Law, P.A. at 1-561-933-4728 today to speak to a knowledgeable attorney with expertise in succession planning for small business.