What is succession planning?
Succession planning is the process of identifying and preparing a successor to take over your business in the event you become unavailable due to injury, illness, death, or retirement. By planning for succession, you retain control over theoutcome.
Why do I need succession planning for my business?
What will happen to your business if you suddenly become unavailable, due to disability or death? What happens when you are ready to retire?
A business succession plan not only means having a plan for the unexpected - including financial hardship, injury, disability and even death - it also means having a plan for the succession or transfer of ownership of your business when it comes time for you to retire.
Not only will succession planning help ensure the future of your business, but it can also have a significant effect on the amount of taxes that your heirs will have to pay upon your death. If you die without some kind of plan in place, estate taxes can start at 37 percent and can possibly reach 55 percent. Your heirs will have only nine months to pay this tax.
How do I get started with a succession plan for my business?
All business owners need to devote time and energy to developing a succession plan for their small business. With a succession plan, the small-business owner identifies a person or persons who can continue the business in the event that tragedy strikes or when the current owner decides to retire or sell. A succession strategy is a long-term event that takes months and, in some cases, years to implement successfully within the small business.
Here are a few things to consider as you plan your business succession:
1. Is this a family business?
A succession plan for a family business should address the following questions:
- Do you want your children to take over the business? Perhaps some children, but not others?
- Are your children able to take over the business, or should they have someone else manage it?
- If you die, will your spouse get control of the business?
- If you sell your business outright to your children, will you pay capital gains?
You will need to decide who will own and/or run the business after you. If your children are not interested in the business, you may want to look elsewhere for a successor.
2. Can your business model survive without you?
Will your business model survive without you? If the answer is “no,” then it is time to make the necessary changes to ensure that your business will survive. To prepare for your possible injury or illness, get disability insurance to be sure that your family has income if you cannot run the business for a prolonged period.
There should be someone within your business who knows how to do your job. If there is not, consider cross-training (or hiring) one or more employees so they can become proficient in all aspects of operating your business. Employees may not be as proficient as you are, but they should at least be familiar with the elements of your job.
Your successor, and the rest of your employees, should be aware of your intentions prior to the change of leadership. These intentions also need to be in writing and on file somewhere within the company and/or with your attorney.
The longer you wait to design and implement a succession plan. the greater the risk that the plan will not meet your goals or that the business will fail when you become unavailable. Often, the business dies when the business owner dies.
3. What are your goals?
It is a common mistake for business owners to attempt to implement succession planning prior to identifying their personal goals.
Prior to designing and implementing a succession plan for your business, consider what your goals are for:
- your future annual income;
- your level of involvement in the business;
- your investments both inside and outside the business;
- your legacy for the future; and
- your personal values.
You will also want to identify the needs and goals of any other stakeholders in the business, such as: family members, other owners, and key employees. Determine whether continuation of the business is important to you and other stakeholders, then figure out who is capable and willing to take on your responsibilities.
Develop a “best case scenario” which balances your values and goals with the needs and goals of everyone involved. This becomes the goal of your succession plan.
What if I need help?
If you need help with succession planning or require other legal services for your business, please contact Deborah Hardin at The Hardin Law Firm, PLC, or another licensed attorney in your area.