The business you own probably comes with a lot of history. If you started it, you may have intended to pass it down for generations or perhaps the business was originally passed down to you. However, you came into the position you are in now, it is so important to think about the future of the business. Passing down the business is not something you want to play by ear and failing to have proper succession planning could cause the eventual loss of the business.
To ensure that operations continue, and clients do not experience any disruption in services your business provides, you need a succession plan. If one has not been put together, it should be done sooner than later, even if you do not have plans to leave your business. Unplanned exits do happen and the urgency for a plan increases the closer to retirement you get.
There are several key steps necessary to succession planning and several ways to go about creating your plan. Some business owners may choose to create their own plan, while other should engage the help of a professional due to the complexity of the plan or the business. Regardless of which route you take, here are some things to consider.
Identify a successor – Many business owners plan to transfer their business to a child or children. This individual(s) should be trained to run the business before your departure and have the commitment needed to run it. If your successor is not skilled and business savvy, you may consider selling your business to a co-owner, key employee, or an outside buyer.
Transfer by gift or sale – If you are like many business owners, you may prefer to have your children inherit the result of all your years of hard work. By gifting the business over time, you can hand over the reigns slowly as your child(ren) become better capable to manage the business, and you can minimize gift and estate taxes.
Depending on your financial needs, you might want to sell your business. If you sell your business outright, you can use the proceeds from the sale to maintain your lifestyle or to take care of any estate taxes or other final expenses. Alternatively, the sale can occur as a buyout that happens over several years or your successor can work at the company for a reduced salary to earn their ownership interest in the business.
In addition to determining who and how you want to see out your succession planning, you will also need to do a few extra steps.
- Determine a timeline of when the succession should take place
- Formalize your standard operating procedures, including an organizational chart and employee handbook
- Value your business and make sure you update it frequently
While it is recommended that succession planning start three to five years ahead of retirement, it is never too early to start. Having a plan in place for passing down your business will reduce future stress and provide the best opportunity for your business to thrive into the future.
Contact the Estate Planning Attorneys at Deliberato Law Center