Small businesses serve as the bedrock of our economy. If you are involved in a family business, surely you understand the importance communicating openly with the people who are slated to take the reins one day. Preparedness for succession should be one of the things you are communicating about.
Despite the fact that family businesses account for 64% of the U.S. Gross Domestic Product (GDP), 43% of family businesses report having no formal succession plan in place.1 Due to the day-to-day demand all business owners experience, it is not a surprise that succession planning tends to get pushed to the back burner. Nevertheless, when you neglect to focus on succession planning, you are putting yourself as the business owner and your family members at risk.
Why Is Succession Planning In Business Important?
There are multiple reasons business owners should consider creating a succession structure sooner rather than later. Let's look at two of them.
The first reason to consider is taxes. Upon the company owner’s death, estate taxes could be due, and a proactive strategy might help to better manage the taxes. The misstep of not properly preparing can also result in a loss of control over the ultimate disposition of the company.
Second, the absence of a formal succession structure could create a decline in the value of the business in the event of an unexpected disability or the owner’s death.
The Process Of Business Succession
The business succession process can be broken into of three basic steps:
- Identify the company goals
- Determine the steps
- Carry out the strategy
Identify The Company Goals
When you know what the objective is, it becomes easier to create a plan to pursue it. As an example, do you desire future income for you and your spouse from the business? After retirement, what level of involvement do you plan to have in the business? Are you thinking about creating a legacy for your family or a charity? What values do you want to establish? What impact do you want to have on your employees or community?
Determine The Steps
Once you have identified your goals, there are many tools to help you achieve them. You might find it helpful to look into gifting shares, buy/sell agreements, establishing a variety of trusts, or even creating an employee stock ownership plan (if you want your employees to have an ownership stake in the future).
Carry Out The Strategy
This important step converts your ideas into action. Once it has been implemented, you should regularly revisit the strategy to ensure it remains relevant in the face of ever-changing circumstances, such as divorce, changes in the profitability of the business, or the untimely death of a stakeholder.
As you can imagine, business succession planning is a complicated exercise that involves an intricate set of tax rules and regulations. Before moving forward with implementing a succession plan, consider running your plan by legal and tax professionals who are more familiar with the process.