Did you know over half of small business owners are between the ages 50 to 88 years old?
It’s only a matter of time before they reach retirement. By then, they should already have a plan regarding how they’ll turn over their business or close it.
However, many of these individuals don’t have a succession plan in place yet.
For the most part, they don’t realize how important it is to have one even if retirement isn’t on the horizon yet.
If you’re asking why do you need to do business succession planning early, keep on reading to get the answer.
1. The Importance of Early Business Succession Planning
It’s no surprise that the process isn’t going to be easy.
Think you don’t have the luxury to think of your business’s future following your retirement? You won’t have the time to come up with a bad succession plan down the line either, so why not do it right today?
Survival of the Business
Think: do you want your company to continue operating without you? Some can’t imagine their company moving forward without them. In this case, they won’t need a successor, they will liquidate the assets and then close the business instead.
If this is your decision, you have to make it clear in your plans and to your employees. You might also sell your business instead of closing it. If so, you’ll have to plan for aggressive growth and exit strategy.
If not, then you’ll have to choose a successor who will helm the company in your absence.
Naming the Successor
If you have a successor already in mind, you can already start planning for the succession. It could be a family member, a board member, an employee, or another individual.
This will promote harmony as the successor will be clear to the whole company. This will also ensure a smooth and simplified transition. You’ll set the right expectations for all the employees and shareholders as well.
Planning the successor as early as now will also allow you to groom them so that they’re ready by the time you leave. This will also prepare them for their future responsibilities.
Note, though, that you must check with your choice first before you name them. Make sure they have the same passion as you have for the business. You must also prepare for those who may have resentment for not being your chosen successor.
Reduction of Taxes
The transfer of ownership and control of a company has corresponding taxes. A proper business succession plan will attempt to minimize these.
Without a business succession plan, estate and inheritance issues might also arise upon the death of the owner. In the end, this might hurt your business if it fails to obtain the money for inheritance taxes.
The succession plan will take advantage of opportunities to lower the payable taxes. For example, married couples can give away up to $10 million in gifts tax-free within a 2-year window. This is because of the 2010 Tax Relief Act.
If you want to know more about possible estate issues and how to avoid them, contact a probate attorney.
2. How to Create a Viable Small Business Succession Plan
It goes without saying this process can get complicated. Following the steps below will help you simplify it and draft a proper succession plan. Don’t hesitate to get help from professionals or family members to figure out what’s best for your company.
Goals and Objectives
Before moving on to the succession planning, figure out your business goals first. Next, consider whether continued family involvement helps achieve those goals. You may bring in professional management and advisors, too.
You’ll also have to think of the management of your business beyond your departure. Determine what goals the next generation management will have. Remember to take into account the retirement goals of the retiring members, too.
Choosing the Successor
Many choose a family member, especially one of their children, to take over the company once they’re gone. This has many advantages, as your family will already have developed loyalty to your business and brand. They’ll also likely to have a deeper knowledge about your business than any other individual.
However, there may be times when you can’t name a family member as the successor. In this case, consider an employee with the right skills, attitude, and loyalty to your brand. Make sure you trust this employee enough to let him/her take over.
You can then plan to sell your business to this employee. You can choose to keep the ownership to your family while letting the employee take the wheel.
Business and Owner Estate Plan
This involves planning for taxation implications when you transfer the ownership. It could happen willfully or upon the owner’s death.
Consult with a lawyer to know how you can minimize taxes. Follow this by crafting a buy-sell agreement with the successor.
In this part, you’ll plan how you can transfer the ownership: through a buy-sell agreement, gifting, or both. You’ll also establish the timeline of all the changes in ownership and management.
Don’t forget to brief your employees about the transition plan.
Let them in on the timeframe and inform them of the changes that will happen afterward. Take the time to ask them what this change means for them. Ask how you can gain their trust in the change of leadership.
You will need to notify your investors and stakeholders well before the transition. Your clients will need to know about your plans, too. Plan how you will break the news to them, whether through a representative or a personal visit from you.
Think of the Future of Your Small Business
A business succession planning is only a part of the future of your small business. There are more tips to follow to ensure a secure financial future.
If you need further advice about managing your company why not check our other blog posts today? Here’s one with several budgeting tips you should follow.