Whether you have a small or large business, you likely want it to outlive you. Business succession planning is an important step to realize that dream.
Business succession planning creates a plan that outlines the candidates that will take over the company’s leadership positions. This plan will outline potential successors or people either within the company or from outside the company that will adopt key responsibilities and ownership of the business. These individuals will fill critical positions within the organization.
Some businesses chose to transfer ownership of the company to a family member, such as a spouse or descendants. The first step in a business succession plan is to define the vision for the future of the company. Where is the business headed, and what timeline needs to be considered? Next, identify the key roles that may require replacement within the next 3 years, 5 years, etc., keeping in mind contingencies, such as, likely reasons why potential successor (family member or current staff) would longer be with the company? If so, consider additional successors.
Another important aspect is determining the fair market value of the business, whether any discounts will be applied, and consider how the purchase price might be paid, and what implications that might have for your or your successor’s tax obligations. For instance, will the potential successor be expected to get a loan and pay the entire price up front? Will you be financing all or part of the purchase price? Will any discounts or gifts of value (to a family member, for example) result in higher taxes for you or your successor? What portion of the business value is attributable to equipment and inventory, and what portion is attributable to good will and name recognition? Will you or any other key employees be employed by the business after the transition or, alternatively, will you be subject to a non-compete agreement prohibiting you from starting a new business in the same field?
Finally, it’s important to review and update supporting business documentation. This may be power of attorney’s, shareholder agreements, buy-sell agreements, or trusts. In addition, important records should be obtained such as bank information, any titles, leases, or rental agreements for the business. Lastly, you may want to consider life insurance policies as a safeguard for your investment in the future of the company.
If you have a small business and would like to discuss your business planning and business succession options, please contact our office to schedule an initial consultation. Legacy Counsellors, P.C. has experience in working with many different types of businesses in the states we practice.