Business Succession Planning: Plan Your Exit Now

Dec 01, 2013 by

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Succession Planning

Business owners invest significant time and money to grow their companies and help them succeed. While most hope their businesses will thrive after they’re gone, many delay the development of a succession plan. This can be risky. Only 30 percent of family businesses survive into the second generation, according to the Family Business Institute. Succession planning helps increase the odds that your business will be built to last.

Is it time to begin your succession planning? Read these FAQs to find out:

What is a succession plan?

A succession plan is a roadmap for how a business will navigate change and how its assets will be treated in the process. It typically outlines a strategy to transfer ownership, either by selling the business, passing it onto heirs or turning it over to employees.

The plan may include details about the value of the business, the future division of responsibilities, agreements between partners and heirs and other factors that can affect the company’s future. The Small Business Administration has developed a resource center to help business owners with succession planning.

What are the benefits of succession planning?

An effective succession plan gives the owner a voice in the future of the business. It can help to minimize estate taxes and expenses, while maximizing the wealth passed onto the next generation. It may also provide stability for the company, employees, customers and family members if the transition is the result of an unexpected event.

Conversely, a lack of planning can leave business partners and family members squabbling through tough decisions. Without a plan, a business might have to be sold to liquidate funds, or surviving family members might disagree about whether to run the business or sell it.

When should a business develop a succession plan?

Once a company has made it through the startup phase, succession planning should be put on the radar. Seems too early? It’s not. At this point, the company has assets and value that should be protected.

Another signal that succession planning should be a priority is if clients have a high level of loyalty to current leadership. The company’s survival depends on them staying with the business after someone new comes to the helm. This requires a succession strategy that leaves time for trust to build between existing clients and the next generation of leaders.

What is the best way to start the planning process?

Establish your goals at the beginning of the process. This will require you to consider things such as how much control you would like to maintain over your business, what your financial priorities are and how you would like to live in retirement. Next, assess your current situation to identify what is working well in your business and what you need to improve.

Evaluate the performance of current team members to identify potential talent gaps. Create a list of processes that need to be documented to ensure a smooth transition. Finally, consider the task force you will need to need to help you with your succession plan. The perspectives of employees, family members, financial advisors and trusted clients may help to make your plan stronger.

What tax implications should be considered?

Work with your accountant and attorney to learn about exemptions, exclusions and deductions that may affect the financial impact of the transition. These include the annual gift tax exclusion that allows you to transfer limited amounts of money to recipients each year without paying a gift tax.

If you plan to sell, get a business valuation from an appraiser to help you understand what your company is worth. This will also help you identify strategies to increase its value before you sell and give insight into what your tax liability might be. The American Institute of CPAs offers a resource center to help businesses understand the financial implications of transferring ownership.

What stands in the way of successful succession planning?

Many business owners begin succession planning with a firm idea of who should succeed them, and it’s often a family member. Avoid limiting yourself to this approach. An article in the Harvard Business Review warns that children who feel obligated to join a family business may resent being in charge, creating a leadership void. If joining the company is presented as an option, they may treat the business as a fallback, starving it of the attention it needs.

A better strategy is to build a profile of the ideal candidate to run the company, even if this person hasn’t been identified yet. Having the right person in place can increase the likelihood that your business with continue to do well once you have left.

Recommended by the Editors:

Talk with a business insurance agent to review a package of protection that can adjust and grow with your business—as it grows.

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Melissa

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