You built your small business from the ground up, but you won’t be around forever. If you plan to retire you have to get out. That’s where the need for a business succession plan comes in. Succession planning involves identifying the new owners, negotiating a price, and establishing a transition timeline, among other details. You can’t expect to hand the keys to a new owner, walk away, and expect the business you poured countless hours into to succeed without a plan.
Tip #1: Start Early
Start planning 5 years in advance, or more if possible. In general, there are a lot of tax and estate planning rules and strategies to know. Starting early gives you the best chance of minimizing your taxes.
You also never know what life will throw at you. Knowing in your head what you want to happen in 5 years is different than writing it down. Establishing a plan early can guide successors in the event you pass away unexpectedly.
Tip #2: Establish Goals & Objectives
The first goal is obvious: you want to pass on your business. But there are many more considerations to document. How much money do you want to get out of it? Do you need a business valuation? What are the tax consequences if you structure it as an asset sale vs. a stock sale? Do you need all of the money up front or can you wait a number of years? Will you stay on for a number of years as an employee or consultant? Will there be an option to retain ownership if the business fails before you’ve been paid off?
You succession plan needs to include the above items and more. You currently have control, but the minute you pass away or sell you lose control, which means you need to document what you want while you can.
Tip #3: Evaluate Talent & Interests
The most difficult part of this process may be evaluating your family members. Are they capable of carrying on your legacy? Do they share your passion? Will they quit when it gets tough? Not everyone is built to be a small business owner, and picking the correct successor is critical to a successful transition.
In the event you analyze their talents and determine no one is capable, you need to look outside of the family. Do you have friends in the industry you could sell to and do a good job carrying on what you built, and trust they’d continue employing your working family members? If not, the final option would be finding a business broker and consider selling to an unknown party.
Tip #4: Articulate Stakeholder Roles
While it may be obvious to you based on family members currently working in the business, you need to document your successors and their expected roles. Perhaps you have one child and they will replace you completely. Others may have multiple family members and ownership will be split. Still others may have multiple family members, but only grant ownership to one or a few. If splitting ownership, document all of the different hats you currently wear and delegate those responsibilities to give them the greatest chance to succeed.
In addition, document a backup succession plan. As we said above, you never know what life will throw at you. If the person you’ve designated as your successor refuses, changes their mind, or dies, what then? Are there other family members capable of succeeding you? Or will you be forced to sell your business outside of the family?
Tip #5: Communicate Succession Plans
Now that the initial planning is out of the way, you need to communicate your plans to your chosen successors. Explaining your wishes and hearing their point of view may even change your plan. Perhaps you always assumed your child would succeed you, but they express that they have no desire to run the business when you retire. Perhaps family members tell you they could never share ownership and work together. While some of the conversations may be difficult, they’re important to have now so they can be resolved years in advance. Transparent communication is key for the successor.
Once the plans are communicated and agreed, contact your attorneys, bankers, and accountants to get the contracts written, financing approved, and financials prepared.
Working with Haworth & Company, Ltd.
We’ve seen our fair share of business succession and sales in the past 30+ years serving the small business community. Working with Haworth & Company gives you a trusted business advisor with access to a wealth of knowledge and experience amongst our 5 offices. Don’t go it alone. Speak to your business advisor confidentially before ever involving family members and get advise on how to structure the deal, save the most money on taxes, and leave a legacy. 5 years will be here before you know it – contact us today!