Succession Planning for Small Business Owners

Succession Planning for Small Business Owners

There are many things to consider when planning for your successor, but there are two main things to consider for a smooth transition: transferring the power and transferring the assets. The planning should start well before you plan to retire so that you have everything in place for an orderly transfer of ownership and continuity of leadership, and the plans should be flexible enough in case changes need to be made. Good succession planning will not only provide you with peace of mind, but also ensure that your business continues after you retire or pass away.

Transferring your business to your successor includes having a good business plan that outlines when the transfer will take place (a specific date or over a specified time period), and include the future goals of the business. If possible you should set up an advisory team of key business personnel to assist in choosing the best successor if there are multiple candidates.

Potential candidates should be adequately and thoroughly trained in the business. If possible you should have a mentoring program in place. And although ownership of the business can be divided among more than one person, the management of the business should only be given to one person so that there are no questions as to who is in charge going forward.

You may want to pass on your business to someone who thinks the same way that you do, but you should consider the future of the business, not just the past. The most obvious choice may not necessarily be the best choice, so you should be as objective as possible keeping in mind what is best for the business.

Business climates change and your successor should be willing and able to not only understand the current strategies and philosophies of the business, but also the long-term goals for possible growth and expansion of the business. Your successor must be willing and able to put in the time required to run the business. In addition to looking internally for your replacement, you should also look outside of your business for your successor by considering people within personal and professional networks.

You could sell the business to your children, after making arrangements for your own retirement needs. This should be clearly communicated in a pre-transfer planning session.

You could gift the business to your children, up to $14,000 per child ($28,000 if your spouse is a co-owner).

Transferring of the assets usually requires advance planning and the services of a qualified professional who can be sure that the transfer or sale is structured to minimize the tax consequences as much as possible. In addition to an accurate valuation of the business, some planning tactics may include:

•· Buy/sell agreements

•o These can be between the business and the current owner.

•o These are often backed by life insurance policies.

•· Private annuities

•o These can be used when the owner sells the business in exchange for an income for life.

•o There are various versions of these that should be reviewed.

•· Trusts (Grantor Retained Annuity Trusts or Grantor Retained Income Trusts)

•o There are various types of these that can be considered to minimize gift taxes or estate taxes.

•· Recapitalizations (for corporations)

•o These involve the issuance of stocks and can be quite complex.

•· Outside management of company assets

•o You can use a bank to manage your investments and assets

•o You can use what are called "multi-family office" organizations which can oversee the assets of a number of families.

In addition to clearly defining what is required of the successor, business goals, his/her salary should be addressed, along with that of any other family members who may be co-owners but not the successor.

With proper planning and communication, the ownership transfer should ensure the continued success of the business and employees.