What is Business Succession Planning?
A railroad track on a bridge spanning a river
Business succession is the process of choosing someone to take over your business, and developing a plan to make it work. While lots of business owners overlook business succession planning until the last moment, it’s a critical part of ensuring the future success of the company.
Although nobody wants to think about handing their hard-won company over to someone else or coming to the point where an exit plan is necessary, planning for business succession is smart for your professional and personal well-being.
Proper business succession planning cuts down on potential misunderstandings and ensures that your family business remains healthy and grows - even after you retire. Good succession planning will also cut down on the cost and the liability associated with the transition.
Planning for Family Succession
Many people start family businesses and commit years of their lives to make it successful. Eventually, however, it comes time to hand the company over. When this happens, planning for family succession is the approach most people take. Family succession is the right option for people whose children or other family members are interested in taking over the family business.
If you’re planning family succession, here are a few critical tips you’ll want to follow:
1. Hire a Lawyer
Even, and especially, if you’re handing your business over to a family member, you’ll want to hire a lawyer to help you.
Because most family succession cases involve a significant transfer of assets, having a lawyer on board will help ensure that you make good tax decisions, that you keep your assets safe, and that your family members take over with a contract that’s favorable to them.
2. Hire a CPA
If you don’t already have a CPA, hire one now. A CPA will work with your lawyer to prepare the taxes for the succession and ensure you’re shifting your tax burden accordingly. This is especially critical in family successions because the transition usually involves corporate gains tax, gift taxes, and estate taxes.
3. Involve Your Employees
If your key employees intend to stay on during the transition, be sure your team understands and accepts what is happening. As you move through the succession process, you’ll find that their insights can be valuable to your decision-making. In addition, retaining these employees through the procedure is a great way to ensure the company’s longevity.
4. Hire an Insurance Advisor
Lastly, you’ll want to hire an insurance advisor when you’re planning a family succession. This advisor can work with you to ensure your buy-sell agreement includes critical language about how you'll transfer your insurance, and who will get the company in the event of the new owner’s death. While many people think they can manage without an insurance advisor, selling your business truly requires the assistance of a skilled and experienced risk manager like an insurance agent.
As you start planning a family business succession, keep these things in mind:
You Need to Set Some Goals
The more stable your goals and objectives are, the more likely you are to meet and exceed them. If you haven’t already, now is the time to review your current succession plan, develop a goal and vision for your company, figure out how and if your family will continue to be involved, provide ample time to the hire professional assistance, and establish retirement goals. Of course, you will need to plan for cash flow needs associated with the transition as well.
Your Decision-Making Should Follow a Process
Even if you’re not handing your business over to family members, it’s easy for the transition and succession process to get highly emotional. Unfortunately, this can lead to significant problems. To make the best possible decisions, you need to establish a process for your decision-making. This includes coming up with a plan for dispute resolution, communicating the succession plan to stakeholders and other family members, and identifying successors, whoever they may be. Be sure to name both owners and managers of the company, if they’re not the same people.
Developing a Transition Plan Matters
Don’t let your business get away from you. Instead, develop a transition plan for business succession and monitor it throughout. Consider options like an outright purchase or bequest, and think about financing for your buyer. You should also make the effort to establish a timeline for implementation and communication with family members, employees, and partners.