It may be hard to imagine right now, but when you think about it, odds are that the business you’ve worked so hard to create will be owned by someone else in the future. Eventually, you will either give up the helm voluntarily before or when you retire, or involuntarily as the result of an unexpected event.
Charting a path for your small business
These changes are why succession planning for business owners is so important. It helps you specify, in writing, what will happen to the business when you retire, become disabled, die prematurely, or otherwise step down. Will it be liquidated, kept in the family, passed on to a key employee, or sold to an outside party? By creating a succession plan today, you can make the decisions now about what will happen to your company in the future.
Make no mistake about it — succession planning is a multifaceted and complex subject. It is not a one-time event, but instead a continuous process that starts with your goals, and builds and improves over time. A succession plan is also a roadmap for you, your family and your employees to help ensure that, in the event you are no longer able to run the company, any ill-advised decisions are kept to a minimum.
What goes into a succession plan?
Like any strategy your business may already have in place, a succession plan follows the same principles. It should address the who, what, when, where, why and how you would like to transition your business. Your professional tax advisors will be able to provide you with detailed guidance on setting up a succession plan customized for you and your company. All succession plans should address the following:
- Your goals
- Your successor(s)
- Ownership roles
- Management roles
- Transfer plans
- Triggering events (death, disability, retirement, divorce, bankruptcy)
- Purchase price/formula to determine price
- Financing including life insurance and disability income insurance
Other considerations for the future of your business
There are other areas that will be addressed as part of your succession plan. For example, you’ll need to indicate the true value of the company. If there are now, or will ever be multiple owners in the future, you’ll want to specify what their ownership percentages will be. If a family member who works in the business is the chosen successor, you should indicate how you’ll plan for other family members, such as other children, who have no knowledge of the business. Another issue to consider is how you’ll keep vital, non-owner management in place to ensure a smooth transition. You’ll also want to include instructions relating to taxes from the proceeds of the sale of your business, and detail what should occur regarding your personal estate plan.
Regardless of what form your succession plan takes, its ultimate success often hinges on timing. The sooner you start planning for the eventual transition, the more flexibility you’ll have in making future adjustments because — let’s face it — the only thing that’s guaranteed is change.
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