Running a business (big or small) is a time- and labor-consuming affair. For most businesses, there are new challenges regularly, but while owners prepare for the daily issues facing them, they often do not prepare for the future. Just when you think you have the daily business under control, something like Covid-19 happens, and that could cause your business to suffer financially or perhaps even close entirely. Looking for a business succession planning attorney? Here are some things to discuss.
Now more than ever, the world of business is unpredictable. It is important to have a business succession plan. Today, succession planning is widely used as a business strategy for transferring the leadership role to one or more employees so that the business can continue to run without hiccups after the owner has left the company or retired. In most cases, succession planning requires cross-training the potential successor so that he or she has the skills and knowledge to run the business. Even if you decide to undertake business succession planning today, it is important to understand that it can take several years to implement the strategy.
WHAT EVENTS WARRANT BUSINESS SUCCESSION PLANNING?
It’s never too early to start business succession planning. There are several reasons why a business succession planning attorney can be very helpful, and they include the following reasons:
- The owner has decided to retire and wants to get someone reliable to take over the business.
- The owner has received a solid and attractive offer for the business from a large corporation.
- There is an attractive offer to join another business or company as a partner.
- The business venture is not going as planned or the mission appears risky, and it is time to get someone else to run it.
- The owner has suddenly become disabled or is in poor health.
- The owner has decided to change his career.
- The owner has no help or can’t find help to run the business and needs to sell the business.
In general, owners who decide to sell or transfer their business interests want some type of monetary compensation. After all the years of hard work, most people want something in return. Gifting of businesses to family or friends is very rare.
WHAT TYPES OF BUSINESSES ARE ATTRACTIVE TO BUYERS?
- If the business has been profitable and is stable
- If the business is in a prime location with heavy road and pedestrian traffic
- The business is much needed in the community and has a great future
- The inventory is of good quality and well maintained
- There are good positive reviews about the business online
- The business has a solid customer base
- The business is in a safe part of town
- The accounting and bookkeeping are clear and transparent
- The business has significant assets
- The business has been profitable and growing each year
METHODS OF BUSINESS SUCCESSION
Since the last recession more than a decade ago, many business owners have set up succession planning, but there are still many who have no succession plans. That can prove disastrous if something happens to the owner or there is a drastic downturn in the economy.
For those considering business succession planning, the ownership can be transferred to a mid-level employee, a partner, or the heir of the owner. The business owner could also select an external candidate to be the new successor.
Some financial experts recommend that business owners have a bona fide business succession plan established for a minimum of five years before the owner decides to retire or venture into a new career. Like all estate and life planning, however, it is never too late to start business succession planning. Since the process can take quite a bit of time, it is recommended to consult with a business succession planning attorney sooner rather than later.
Steps involved in creating an effective business succession plan:
- Establish a timeline of when you plan to retire or pass on the business to someone else.
- Consult with your high-level employees/stakeholders.
- Meet with your accountant, attorney, and tax consultant to build a road map for transitioning the business. This “design” meeting will help evaluate the feasibility of the economic planning.
- Identify possible successors both internally and externally.
- Plan operating procedures when the new takeover will begin.
- Determine how to value your business.
- How will the succession plan be funded?
- You will need about 6-9 months to collect and prepare all the documents, during which time you should be vetting external/internal people to take over your business.
- In addition to business valuation, the succession plan often requires the rate of sell-down by the departing owner and the buy-in by the incoming successor.
- In most cases, review of the owner’s insurance policies, their will, and their trusts will be reviewed, and, depending on the findings, the compensation, buy and sell agreement, and employee incentive plans may need to be modified.
- The valuation of your business is the trickiest part because it may change with time. One needs to have a realistic number. If you are planning to retire, then the valuation should be at the higher end so that you are compensated well, but it should be on the lower end if one of your family members will be the next successor.
FAMILY-OWNED BUSINESS SUCCESSION PLANNING
If you are running a family-owned business, you will need to consult with lawyers who at the same time can create an estate plan with provisions for a will and/or trust that will ensure that the business owner passes on to interested family members. As well, the attorneys can help create a family limited partnership and/or limited liability company that can ensure the transfer of the ownership interests to the selected family member(s) and minimizes gift and estate taxation.
During the creation of a business succession plan, tax considerations should always be taken into account. Tax considerations must be determined for the entire business entity, as well as the purchasers and sellers of the relevant business ownership interests. The tax considerations may vary significantly depending on the tax status of the limited liability company or partnership for income tax purposes.
Business succession planning is not just a matter of finances, it is also about preserving the legacy you helped to create. In most cases, the departing owner has put a lifetime of effort into the business and would like his/her legacy to continue. Instead of selling the business, the owner can transfer ownership of the business, while at the same time retaining some duties and a salary. Business succession planning requires a carefully thought-out strategy so that both the departing owner and the new successor benefit. The best advice is to consult with a business succession planning attorney. Elder Law, P.A. has the experience needed to help guide you through a successful process. Call us today at 1-561-933-4728.