Succession planning for businesses establishes an exit strategy for retirement which includes a succession plan, transferring ownership of the business, and paying taxes.
Why Is Succession Planning Important to a Business?
Any business owner with a successful business, should consider having a business succession plan in place for the following reasons:
- It 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.
What Is the First Step in Succession Planning?
The business owner needs to look at the current and future needs of the business and who the best future leaders of the business will be. These needs will likely change overtime and depends on business goals and leadership. They could be the incorporation of a new technology, employees with new skills and knowledge, new leadership skills, a change in business direction.
How Do You Plan a Business Succession?
The starting point in developing a succession plan depends on the following question: Is your business currently growing?
The four possible answers to the question are:
Option 1: Employee Buy-Out:
This is a suitable option when there is/are key employee/s who can continue the business and there are 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. Working with an experienced business succession planning attorney will give you peace of mind, the time you need to do it right, and maximize your returns.