Setting up a Succession Plan for Your Business
Summary: Business succession planning involves creating a plan for someone to own or run your business should you retire, become disabled or die. Click through for ideas on passing control to the next generation.
Once you’ve become comfortable with the idea that you want your business to continue after you’re no longer around, you must plan for succession in order for it to become a reality. How do you start?
Find a successor. If you have a family member who you think is up to the job, you can consider transferring ownership through your estate planning process. Look at your pool of existing employees. You can prepare your workers for management and leadership roles so they’ll be ready to replace you or other managers when the time arises. Just keep in mind that leaders aren’t always easy to find and it takes time to mentor someone into a management role. Is there anyone at the business who knows the general operations already?
Train for leadership. Once you find someone, create a training plan not just for the new CEO but also for everyone whose roles will change once you exit. You may find many people need to learn skills, gather information and practice leadership roles critical to the future success of your business. Your return on your training investment comes not only by ensuring that your successors don’t leave the business but also by creating a pool of employees ready to step into the role if someone does leave.
How to sell
You’ll want to determine the best selling arrangement, which usually involves a buy-sell agreement to ensure fair compensation and maintain control of the business. Other common ways to transfer ownership:
- Co-owner — Sell your shares or ownership interests to a co-owner.
- Key employee — Sell your business to a key employee who’s experienced, business-savvy and respected by your staff.
- Outside party — Sell your business to an entrepreneur outside your organization.
- Other owners — If your business has multiple owners, you can sell your ownership interests back to the company and then distribute them to the remaining owners.
A business succession plan guides you through the change in ownership. If a purchase is involved, the sale price and purchase terms are clearly outlined, relieving your family’s stress. Your plan aims to benefit everyone — you, the departing owner, the business, employees and the successor.
Your plan can include:
- The succession timeline — Details when a succession would take place.
- Your potential successors — Their strengths.
- Formalized standard operating procedures — A collection of documents, procedures, employee handbooks and training documentation.
- Your business’s valuation — The valuation of your business should include the method used for valuation. It should be updated frequently.
Consider the tax implications
Looking at the family succession plan, you’ll have to think about tax exposure arising from one generation giving way to another in a closely held family business. Multiple types of taxes have to be considered, including:
- Income tax.
- Gift tax.
- Generation-skipping tax.
- Estate tax.
You’ll want to start family succession planning as soon as you can in order to have more flexibility with the plan. Consult with an attorney and an accountant to put the proper estate documents in place.
Succession plans serve an important function in your business’s lifespan if anything happens to you. The plan can help reduce headaches, drama and monetary loss so your operations continue and clients don’t experience any disruptions in service. Ensure that the business operates smoothly throughout the transition. You don’t want your family or heirs to be forced to sell the company under duress and, in effect, shortchange the value of the business you’ve built.
You don’t spend 30 years running and building a business only to leave empty-handed. The majority of the value in your company can be found in its goodwill and intangibles. A succession plan works when you know how your business will transition, who will take over, and how heirs and partners will be compensated.