Succession planning for businesses establish an exit strategy for retirement which includes a succession plan, transferring ownership of the business, and paying taxes.
Reasons Your Business Should Have a Succession Plan
Having a succession plan in place can save your business whether the transition is due to an expected (retirement) on unexpected reason (death, disability, etc.).
It can help your business foster cooperation and avoid future conflicts in choosing successor leaders.
It allows to choose a successor (family, employee, third party) and train them for a smooth transition.
It creates a timeline that allows a transition out of your full control to the new leaders.
In some situations, selling a business is not a viable option.
If You Own a Business, It Is Time to Develop a Succession Plan
The starting point in developing a succession plan depends on the following question: what is your goal as a business owner? There are four possible planning options:
Option 1: Employee Buy-Out:
This is a suitable option when there is/are key employee/s who can continue the business and no family members who can continue with the business.
Plan the transition in advance by identifying key employee/s.
Incentivize employees with bonuses or equity participation.
A shareholders’ agreement can be implemented.
Option 2: Family Transition:
This is the best option to continue your legacy and goodwill when the business has a suitable family successor.
The estate planning allows for this transition.
Strategic planning is critical when there are competing family interests. For instance, you may need to reorganize the business structure to balance the business and family members’ needs.
Plan for tax deductions and exceptions.
Option 3: Arms’ Length Transaction:
This is a good option when the business operates strong and independently from the owner. Each party is acting in their own interest with equal bargaining power.
The business may not be sold as a unity. Negotiations can tear the business apart, identify non-saleable and inactive assets.
Sales agreement spells out and legally document key considerations: intellectual property, workforce, non-competes, warranties, etc.
Option 4: Winding-Up Your Business:
This option is appropriate when the business relies entirely on the current owner and is unsaleable.
The process is simple, and the business can be wound up quickly.
Liquidation from the disposal of assets has the lowest return on investment.
Creditors have priority on funds from asset sales.
Choosing the right succession strategy depends on your goals and the status of the business. If your goal is money, selling the business in the open market is the best option. If you want to keep your legacy within your family, then family succession or selling the business to an employee might be the right options.
If you want to maximize your returns, you need to plan your business exit strategy in advance. Planning will give you peace of mind, the time you need to do it right, and maximize your returns.