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As a small-business owner, you have a lot on your plate. However, managing your company’s day-to-day operations and keeping up with deadlines should never overshadow one major consideration as a leader: your succession plan.
If you haven’t created your own, you’re far from alone. In fact, only 1 in 3 family-owned U.S. businesses have a robust and documented succession strategy, as found by Foster Swift Collins & Smith. However, in the event that you’re unexpectedly unable to remain at the helm of your company, your family and your employees may be left struggling without a plan in place.
You’ve worked hard to build your brand as a business owner and create a thriving company. Learn how you can maintain that well-earned legacy all while supporting your loved ones and fellow team members down the line.
Why do I need a succession plan?
A succession plan ensures that your business will continue to operate successfully after you retire or are no longer able to remain in charge. In addition to naming key employees and outlining their responsibilities during this transition, it also identifies your replacement to ensure there’s no hiccup in revenue or business continuity.
It can be all too tempting to put off this important consideration until you’re getting close to your retirement. Many owners may delay it due to a lack of time in addition to the potential emotional toll succession planning can have on those involved. However, there are several reasons that this decision can prove to be a costly mistake. Family members who are uninterested in the business, or are not prepared to take on your role, will be forced to field leftover payments and potential legal disputes all while your employees are left with no plan in place.
By taking the time to outline your succession plan in advance, not only can you ease the burden on those who rely on you, but you can also ensure your own security in retirement while minimizing potential tax exposure.
Much like planning for retirement, it is important to start sooner rather than later. The sooner you start to understand the tasks and obstacles in front of you, you can better determine the necessary steps that will need to be taken for a smooth and seamless transition away. Business owners will often think of their businesses as their retirement plan. Too often we see people waiting until that impending sale to occur to start thinking about the succession planning that will need to be implemented with that sale.
Most importantly, it is critical that to have a proactive mindset around this. Always begin with the end in mind so that you can effectively prepare for when the end comes.
Considerations for a smooth transition
Your succession plan should always reflect your personal goals for the future. Ask yourself: What should the plan accomplish? Typically, you’ll have the following options to choose from:
● Transferring to a family member, employee or partner.
● Selling to a third party. ● Closing and liquidating the company.
If you do decide to name heirs, you’ll need to decide who in your family is prepared to operate your business. Additionally, you’ll want to consider the possibility of whether more than one heir will be interested in running the company and how those family members will distribute profits.
There are several options when it comes to selling to an employee or partner. For instance, you can finance the sale over several years as you train your named successor, ensuring they are fully prepared to take on the job. As explained in the Business Journal, a comprehensive succession plan typically incorporates a transition plan whereby ownership and control don’t simply switch upon the death of the owner. Instead, it details the transition over a period of time, potentially phasing in the successor based on certain milestones.
Deciding to sell to an outsider or to close your company will take some work in advance to maximize your profits. From organizing your records to potentially marketing your company to buyers, you may need additional professional support during the process.
As one of the largest assets you own, your succession plan is also a key component of your estate plan. No matter which route you choose, it will be important to plan for the tax implications upon sale or transfer of ownership, death or divorce. Consider which strategy might best suit your needs and minimize taxes before the time of sale.
Once you’ve decided which path to take with your succession plan, document everything. Detail all structural aspects and share your plan with any heirs to minimize the chance for a future dispute.
Getting started with succession planning
Planning your succession does not signal the end of your time as a business owner. Instead, it’s a fiscally responsible strategy that not only ensures your own happiness during retirement,but also the security of those you love. Plus, with a comprehensive succession plan in place, you can move forward with confidence that your business will continue to grow.
If you’re ready to begin thinking about your own plan, please get in touch with our team here at SDA Wealth Strategies.
References:
Foster Swift Collins & Smith. (2021, December 30). Succession planning for business owners: More important than ever. GlobeNewswire News Room. Retrieved January 25, 2022, from https://www.globenewswire.com/news-release/2021/12/30/2359347/0/en/Succession-Plan ning-for-Business-Owners-More-Important-than-Ever.html
Union Bank. (2022, January 1). Bizjournals.com. Retrieved January 25, 2022, from https://www.bizjournals.com/portland/news/2022/01/01/tips-to-transition-for-your-family-ow ned-business.html