Business Succession Planning: The Basics

Many small business owners find themselves facing a common question: What would happen to my business if I were no longer able to run it? Whether the situation is a sudden death, illness, or hopes of retirement, it is important to have a business succession plan in place to make any transitions as smooth as possible. A lucrative business can easily fail if a proper plan is not in position.

There are two primary types of succession planning: retention planning and buy-sell planning. Retention planning usually involves bequeathing the business to a family member or other trusted associate. Buy-sell planning is done with the intention of selling your interests to other co-owners or employees, or to an outside party. Which type of planning is best for you? The following are initial points to consider when making these decisions:

→ Familial interests- Will you create animosity in your family if you leave the business to one person? Do you see them fighting over control or assets if you leave the business to several relatives? Are your relatives qualified to take over the business?

→ Employee interests- Who can you trust to take care of your long-time employees? What will happen to them if you sell the business? If you pass away? Are you able to honor promises for pensions and benefits?

→ Management succession- Can your employees run your business successfully without you? If not, should you hire someone who can take your place?

→ Shareholder expectations- If you have shareholders, will they approve of the person you appoint to replace you? Will they be satisfied if you close or sell the business?

→ Personal goals- When do you want to retire? Does that mean selling the business to cash out? Are you planning to move out of the area? What do you want to leave your family when you are gone?

→ Tax Liabilities- What options provide the least tax consequences to your business? To your family?

→ Estate Planning- Do you have a Will or Trust set up to protect your business and real property should you pass away? Will your business be subject to probate? Do you have a Power of Attorney in case you become ill?

Every business is unique, as is every business succession plan. There are actions that may be taken now to prevent difficulties in the future, such as placing real property in a trust, purchasing life insurance with the business as a beneficiary, setting up a system of partnerships, altering structure to make the business less dependent on you, properly executing your personal estate planning documents, and apprenticing possible beneficiaries of the business.

Our attorneys can customize your business succession plan to best fit your needs and those of your company.

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