NOTE: This is the second blog in a series on business succession planning. If you have not read the first blog of this series, please do so before reading this second part.
Click here: What Will Happen to Your Business if …?
You, the business owner, have built a thriving business. While there were years of sweat (figuratively and literally), inevitable financial ups and downs, and sacrifice by you and your family, your business now serves you and your family well. Business owners understand the benefits of a business plan to start and grow their business. Unfortunately, business owners frequently do not put the same emphasis on planning for one of the biggest changes in their lives – the sale of their business to a third party or the transfer of control to the next family generation or other family member. This planning is known as succession planning.
Change is difficult for many, including business owners. It’s easy to understand. Business owners are focused on the business, believing that planning for a change in the business’ ownership will just have to start “later.” The problem is “later” never happens and then the business owner dies, becomes incapacitated or must retire because of health reasons. This often results because there is no plan, or the plan was not maintained over the years, and the business owner’s legacy to the family becomes one of uncertainty or insecurity.
Below are suggestions based on several years observing what is described above. Our firm provides settlement services for deceased persons’ estates. In doing so, we see what the lack of planning will do to defeat the successful transfer of family businesses. Every business owner has a choice: (i) do the planning and then implement and maintain the plan, or (ii) leave it to chance and hope that divine intervention allows for a successful succession of the business.
There is nothing mysterious about how to go about business succession planning. It really gets down to this: Business succession planning is for the continuation of the business and the future security of the business owner and their family.
Below are positive steps to take over an extended timeline.
Plan early, review often and update.
Early planning for the succession of a business to the next generation or to a third party is ideal and recommended. It’s not one (plan) and done. The plan must evolve to account for changes in the business, along with changes with its owner and the owner’s family. Annual, formal updating of the succession plan to deal with the unexpected is the key to having a plan that will work. Whether there is a change in the family, the economy, the industry, the business, or the law, (like it or not) change is inevitable. When those changes are dealt with in an updated plan, the probability of a successful change in control of the business and attaining the owner’s goals increases dramatically.
The business owner that plans years before any change is expected or desired will have the time needed to understand the options, devise the action steps needed to make the plan happen and allow time to implement the plan. A business succession plan is part of the owner’s overall estate plan, making it a critical part in achieving the economic benefits the owner desires for the owner and their family.
Timely estate and disability planning for the owner and their family.
Succession planning is a subset of comprehensive estate planning. Each must be in harmony with the other to attain the overall goals of the business owner and their family. It is common in estate planning for a business owner to use more than one estate planning strategy to lessen the tax burden on their family.
Implementing the strategies early and not waiting until there is a signed agreement for the purchase of the business will add to the options available for the benefit of the owner and his or her family. There may be numerous planning strategies to consider. It depends on the goals of the owner. Besides gifting to family members during the business owner’s lifetime, there are different types of trusts to benefit the owner’s family and wealth transfer techniques to mitigate taxes.
Preparation, implementation, and maintenance.
When a real estate owner wants to sell their real estate, the wise owner will take time to plan when and how the real estate will be marketed. The owner will want the property to “show” well. A wise business owner will make sure the business will show well to prospective buyers. That means everything from confirming vendor contracts, legal entity documents, tax reporting, accounting and key employee arrangements are properly documented and up-to-date.
This discussion will continue. Stay tuned.