Critical Components of Business Succession Planning
Michele L. Miller, Esq.
You started your business with a vision and invested your time, money, and talent to cultivate it into a successful enterprise. But have you thought about planning for the next stage? Business succession planning is often an afterthought or put on hold until it’s too late to conduct any meaningful planning for succession of the business you spent your life building. However, early planning is the key to successful planning.
1. Determine Your Goals
There are as many reasons to desire a certain continuation, winding up, or sale of your business as there are businesses. The first step is determining your goals. Do you want to keep the business in the family? Do your family members have an interest in owning and operating the business? Are there family issues that need to be resolved? Do you want to maximize your profit on the sale of the business, or are you willing to accept a lower purchase price to ensure continuity and employment of local talent? Have you identified the appropriate successor(s) for both ownership and leadership? Will you depend on the business’ cash flow in some manner for income following a sale or transfer? These are just a few examples of items to consider prior to commencing succession planning.
2. Put Together Your Team of Advisors
Business succession planning is more than just facilitating the transfer of ownership and management. A comprehensive plan should focus on you, the business owner, and what you envision your life to be after your disengagement from the business.
Your team of advisors should include your accountant, financial planner, and attorney. From there, your team members will be determined by your goals. If you want the family business to be owned and managed by family members, your team should include those members who will play critical roles in the future of the business. If you are a co-owner, involvement of the other owner(s) will be necessary. Finally, key employees, particularly those whom you hope will take an active role in leading and managing the business, should also be on your team.
3. Consult with Each Team Member
Your accountant and attorney will advise you regarding the tax aspects for various types of succession. If you intend to sell your business, you will need to understand the income and capital gains tax consequences and discuss ways in which to reduce the overall taxes you will pay. If you intend to gift your business, determining the most tax advantageous method of accomplishing the gift will be necessary. For either option, changing the entity structure or type may result in a more tax efficient sale or transfer.
Your attorney will also advise you regarding estate planning and the appropriate tools to implement your goals, reduce or eliminate estate taxes, address concerns, and provide flexibility.
Your financial planner will work with you to determine how long you may need to continue working, whether before or after a sale or transfer of the business, and the income you can expect in retirement. This information is critical for determining how a sale or transfer will affect your retirement plans, particularly if the sales proceeds or continued payments will support you in retirement.
The co-owner(s) will need to be involved in the negotiation and implementation of or revisions to shareholder or buy-sell agreements, operating agreements, bylaws, and other governance and employment policies.
Family members and key employees will be necessary for ensuring ongoing operation and success of the business. While it is critical to identify those family members and key employees who will be involved in the succession and transition, it is equally important to recognize those family members and employees whose talents may not include successful leadership and management skills. Future success of your business will rely heavily on those family members and employees with the skills and strategic thinking necessary for continued successful operation of the business. Providing training and resources to prepare those family members and employees for the roles you hope they will one day assume is also important.
4. Make It Happen
After you’ve consulted with your team members and designed an overall plan, you must sign the necessary documents and institute necessary changes in your business and personal life to implement the plan. Thereafter, you should review the plan as needed to determine whether your goals have changed or revisions to your plan are needed.