Business succession planning is essential for the business owner. No business can survive without a capable leader and manager. Sudden retirement, illness, or death could leave the business scrambling to find a replacement. For the small business owner, this could leave the family without income as the business goes untended.
The goal of business succession planning is to provide a smooth transition for the business. This may be to other family members, partners, or completely new owners. A custom-made business succession plan will provide comfort to family members, employees, customers, investors, and others that the business will continue to operate and thrive.
Business succession planning can be designed to fit any business model and should address the following issues:
- Arrange for a transition to appropriate family members or partners. With a retention plan, the right family members can continue to operate the business. Or if the family does not want to be involved, the business can be purchased by partners for fair market value.
- Keep critical employees and co-owners. Every business has important individuals that are needed to survive and thrive. Providing for the retention of those individuals will increase moral and encourage a more active role in the business. There are various tools available, from simple raises to promotions to the granting of stock options.
- Operate jointly with an estate plan. The business succession plan needs to work jointly with an estate plan. This includes minimizing estate, transfer, and income taxes relating to the business and estate as a whole.
- Establish procedures to ensure the business has sufficient cash flow or insurance to pay taxes or buy out a partner’s share. An inability to meet the obligations of the business could bankrupt the business before it had a chance.
- Establish a means of valuing the business agreed upon by partners and others. Without a pre-agreed upon method, partners have a vested interest in over-valuing or under-valuing the business when a partner leaves. This typically leads to disagreement and frustration.
- Implement a family employment plan with well-established policies and procedures that provide for hiring guidelines, payment, and supervision. It is common for family members to join the business enterprise until it stabilizes and replacements can be hired. Family members should be compensated for their time and effort but they will also need to realize their role in the bigger picture.
There are many other factors to consider based on your business, how it operates, your goals, and family desires. That’s why its important to work with someone familiar with business, tax, and estate planning laws.
Contact Yeager Law for any questions, comments, or concerns.