Many entrepreneurs spend a lifetime putting blood, sweat, and tears into building their own business. Too often, this dedication to the business falls short in one aspect: succession planning. All business owners need to consider what will happen to the business in the event of retirement, death, or disability. Making an advance plan can help preserve the business or preserve a legacy. There are several factors to keep in mind when planning for the succession of a small business. Below, several key factors regarding family business succession are discussed:
- Identify a successor(s). Many small business owners plan to transfer their business to a child or children, or even grandchildren. In the case of multiple children, it is important to consider which of them has an interest, and the skill set, to step into the role of maintaining and/or growing the business successfully. When considering a successor within the line of descendants, skill and business acumen, rather than birth order, should be considered.
- Encourage participation and familiarity with the business before transferring ownership and management duties. For the continued success of the business, your successor(s) should be familiar with the role they will fill and be trained to run the business before your departure. Training should be addressed before the official transfer of management and ownership. Many business owners transfer management control of the business to their successor(s), while staying involved as an advisor, then move to transfer of ownership.
- Decide whether to transfer the business by a gift or a sale. Although each family dynamic and circumstance is different, many business succession professionals recommend that the next generation have an economic stake in the success of the business by purchasing at least part of their ownership interest. If your successor does not have the funds to pay a lump sum for the business, the sale can occur as a buyout that happens over the next several years. Alternatively, the next generation can work for the company at a reduced salary to earn their ownership interest in the business. There are several ways the transfer can take place. We can help you decide which option is the best one for your particular circumstances.
- Think about your needs for retirement. If you will need a continuous stream of income, consider playing a limited ongoing role in the company in exchange for a salary. If the successor is purchasing the business, your retirement needs can be addressed in that way.
- Plan with an eye toward minimizing your tax liability. When the time for transfer arrives, there tax considerations to make. For example, gradual transfer of the business through gifting of shares each year can be beneficial in some circumstances. We can help you accomplish the transfer of your business in a way that minimizes your income, gift, and estate tax liability.
Succession planning is critical to creating a lasting legacy for your family. We can help you put a plan in place that helps successfully pass your business to the next generation. Contact our office today to set up a meeting.