Business succession planning: Preparing for the future
Last updated: January 1
As a small business owner, you've invested significant time, money and energy into your business to help it succeed. Whether you're nearing retirement or simply feel it's time to move on from the business you've built, you likely want to see it continue to thrive. Succession planning may help increase the odds that your business will be built to last.
What is a succession plan?
A succession plan outlines what will happen when the owner of a business decides to leave their leadership role, says Entrepreneur.com. It's essentially a road map for how the business will navigate this change and how its assets will be treated in the process. Think of it as a plan for transitioning leadership, 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 any other factors that can affect the company's future.
What are the benefits of succession planning?
An effective succession plan gives the owner a voice in the future of the business — helping to ensure that it will operate smoothly, the appropriate people inherit the company and, if you're selling the business, that you get a fair deal, says Inc.com. Having a plan in place may help minimize estate taxes and expenses, while maximizing the wealth passed onto the next generation, according to Entrepreneur.com. Designating someone to fill your role may also provide stability for the company, employees, customers and family members, particularly if the transition is the result of an unexpected event.
Entrepreneur.com also notes that a succession plan is particularly important for a family-owned business. It's important to decide whether a spouse or children will take over the business. Maybe only some of your children are interested in taking on the role, or perhaps you have a business partner who can manage the company while your relatives retain ownership. There are a lot of decisions to make, and a lack of planning may leave business partners and family members squabbling through tough decisions regarding the future of the business.
When should a business owner develop a succession plan?
Succession planning should be on the radar from day one, says Inc.com. Seems too early? It's not. Even in the early stages, your business and your vision for it have value that should be protected. Planning early may help in the long run, as it gives you time to improve the business so that, should you choose to sell the business, you can get the best sale price, says U.S. News and World Report.
What is the planning process?
Establishing your goals is key to the planning process, according to Forbes. This will require you to consider things such as how much control, if any, you would like to maintain during the process of transitioning your business to its new owners. You'll also want to consider your customers' needs and how you envision continuing those relationships with the business. Don't forget to prioritize what you'd like to do in the future as well, such as activities you'd like to enjoy in retirement, says Forbes.
Next, Forbes recommends evaluating the current structure of your company. Does it make sense to continue operating the same way, or should responsibilities be shifted? You'll also want to start considering who an appropriate successor would be — taking into account the necessary skills and abilities, as well as what type of leadership will be effective for both the business and within the industry. Inc.com notes that choosing a successor before your departure allows time to train them appropriately. Knowing this person will eventually be your successor may also help employees transition to new leadership, says Entrepreneur.com.
Are there potential tax implications to consider?
Whatever the future plans are for your business, every succession plan must comply with the Internal Revenue Service (IRS) tax code. Entrepreneur.com says getting a business valuation is a good starting point, as it will give you an idea of how the IRS values your company. From there, you can start to determine the potential tax liability of selling or transferring ownership of your business.
It's a good idea to work with a tax professional and attorney so that you understand the exemptions, exclusions and deductions that may affect the financial impact of the business transition. For example, if a family member is taking over the business, the Small Business Administration notes that your successor may be responsible for estate and gift taxes. Or, if you sell your company, Entrepreneur.com notes you may have to pay a capital gains tax — a federal tax on the profits you receive from selling an asset, such as a business or stock shares, says The Balance.
Whether you're just getting your business off the ground or you're looking to retire, having a succession plan in place is important for small businesses. Having these plans laid out can help your business move through changes and increase the likelihood that your business will continue to succeed for years to come.