If you own a small business, developing your succession plan is a critical element of business planning. Busy with the day-to-day management of their companies, many business owners neglect this essential element of business planning to their detriment.
Transitions in business are prompted by retirement, sudden illness, incapacity, death, or other major life events. Failure to plan for the inevitable transitions of life puts a business’s survival at major risk. For example, death or disability could disrupt your company’s key systems if other individuals lack the knowledge and experience to lead the company in the absence of its original owners and managers. A business succession plan addresses these issues by identifying and implementing the strategies necessary to successfully transfer leadership from one group to another. By carefully crafting your business succession plan, you can facilitate the proper preparation needed for a smooth transition within the company.
To develop a sound plan, you must consider your desired exit strategy. There are several options available. Some business owners decide to keep ownership and management within the family. This option is often selected when one desires to grow and nurture specific family values over time. If this situation arises, a transitioning owner should explicitly document and teach those said values. Additionally, current leadership should assess which family members have the ability and interest to lead the company.
In other instances, business owners may choose to pass leadership to a key employee who fully grasps the nature of the business. When a company’s leadership opts for this transition strategy, it is important to determine the additional training and development the successor may need to usher the company into its next stage. Another important consideration is ensuring that the employee has the financial ability to purchase the business. As the current owner, you may have to assist the employee in securing the financing necessary to buy the business.
Another strategy is to sell the business to a third party. An external party may be able to make better decisions regarding the future of the business due to their unbiased point of view. New leadership could result in high turnover during the transition period, but with proper preparation and support the new leadership and existing staff can adapt successfully.
Finally, business owners can choose to pursue a hybrid option where management is turned over to a key employee while the family retains full or partial ownership. This strategy allows the family to maintain financial rights as well as top-level decision-making power, while simultaneously preserving the most qualified candidates to manage the business.
Each of these options presents its own benefits and disadvantages. Early analysis of these various options will allow owners the time needed to prepare their successors.
There are a few other matters that must be considered when preparing a business succession plan.
- Taxes. The various successor options may lead to different taxation issues. One should consult a tax professional to explore the estate, gift, income, and sales tax implications of the transition.
- Valuation. In any business succession, it is important to identify how much the business is worth and the practical implications of that valuation. The valuation will not only have tax consequences but also affect negotiations when it comes to the transfer of ownership.
- Insurance. Business succession planning is often accompanied by insurance planning to ensure that the cash necessary for the plan is available. Business owners may seek life insurance, disability insurance, and key person insurance to fund transitions and keep businesses afloat during death or disability—the more unexpected life events that often trigger these transitions.
Once a business’s leadership has determined its exit strategy, the legal, financial, and practical elements of the transition must be set in place. A common legal solution for outlining these elements is the buy-sell agreement. When implementing a buy-sell agreement, significant attention should be given to the triggering events and legal mechanisms set forth pertaining to the valuation, buying, and selling of business interests. Drafting this document should be coupled with sound tax and insurance counsel.
Schmit Law Firm Can HelpThe best time to begin succession planning is now. Navigating the legal implications of business transitions can be complicated, but we are here to help. Call our office or visit our calend.ly link to schedule a meeting with me. Our team is ready to provide sound advice and legal solutions to facilitate a successful transition.