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Many small business owners overlook the benefits of succession planning. The demands of operating a business from day-to-day take priority over determining how they will exit the business. Regardless of whether you intend to exit your business in the next five to ten years or you never intend to exit your business until the day you leave this world, developing a business succession plan can benefit your business in numerous ways now and in the future.
How Many Business Owners Have a Succession Plan?
The number of small business owners without a business succession plan is shocking. One study conducted by Wilmington Trust found that 58 percent of the small business owners surveyed had no business succession plan. Another poll conducted of business owners revealed that three in five small businesses have no business succession plan. Of those businesses without a business succession plan, 47 percent of the owners believed no succession plan was necessary.
Age seems one factor in whether a small business has a succession plan. A greater number of millennials have a business succession plan compared to Baby Boomer and GenX business owners. James Roberts, a succession planning and wealth management executive with Community Wealth Advisors in Rockville, Maryland, commented that “Many small business owners in their 50s and 60s seem to suffer from Ponce de Leon syndrome. They refuse to accept the possibility of their own demise, or assume that advances in medicine will keep them healthy indefinitely. … But deep inside, many are mentally ready to retire, but don’t know how to approach planning challenges or what they will do next.”
Too many business owners focus solely on the here and now. They are under stress to grow their business or keep their business financially solvent. Other owners assume that business succession planning is too expensive and time-consuming to bother with when they are operating a successful company.
Some business owners enjoy operating their business too much to think about a time when they would exit the company. They avoid business succession planning because it forces them to consider giving up their company. They also assume that a family member or valued employee will assume the company reigns when the time it right.
Regardless of the reason a business owner may claim for failing to have a business succession plan, the fact remains that the owner is giving up a valuable opportunity to ensure the legacy and success of the business even after the owner steps aside by failing to develop a succession plan. Early planning gives the owner more flexibility to tailor a business succession plan that allows the owner to remain with the company in a capacity he or she chooses for as long as he or she desires.
Why is Succession Planning Important for Small Businesses?
Succession planning for small businesses is important for several reasons. The benefits of a business succession plan benefit the owner, the company, and the successor owners. It also benefits customers and clients by ensuring that the company will go through a stable transition, which enables the company to continue providing the goods and services that customers and clients have come to rely upon for many years.
Benefits of a small business succession plan include, but are not limited to:
Stable and smooth transition of the company when the time comes.
Maximize the value you receive for your company if you transfer the company to a third party or liquidate the company.
Maintain your lifestyle during your retirement.
Choose how you exit the business, including creating one or more roles for yourself to continue working for the company after transitioning the company to a new owner.
Provide for your family’s financial stability and future.
Plan for your incapacitation or the incapacitation of key employees.
Choose and train a successor for the company.
Create a plan to liquidate or transfer the company, if it becomes necessary.
Create roles for family members within the company.
Identify any weaknesses within the company and prepare a plan to remedy those issues now.
Identify key employees and develop a plan to retain those employees after the transfer.
Prepare to handle unexpected events.
Determine the legal documents and financial tools necessary to carry out your business succession plan.
After completing your business succession plan, remember to review your plan regularly. Business, industry, and life changes may necessitate changes to your succession plan.
How do You Plan a Business Succession?
The first step in developing a business succession plan is to think about what you want to do with your business when you exit. Discuss your thoughts with close family members who may be affected by the transition. Your decisions could have a significant impact on your family.
It can also be helpful to spend time identifying your personal and financial short-term and long-term goals. These goals can help guide you as you determine a path for your company with and without you at its helm.
You may also want to meet with a Maryland business lawyer, financial advisor, and CPA (certified public accountant). When selling or transferring a business, many legal and financial issues must be considered. Having legal and financial professionals guide you through these issues can help avoid mistakes or errors that could cause unnecessary expenses while maximizing the value of your business for yourself and your heirs.
Small Business Succession Planning Best Practices
It’s beneficial to review all options when developing a business succession plan. You may assume that you want to transfer your business to a family member. However, does that family member want to go into the family business? By examining all options for exiting your company, you can determine which option works best for you and your family, including which option helps you attain your long-term personal and financial goals.
Small business owners typically have four options for exiting their business:
Option One: Transfer The Business To A Family Member Or Family Members
Many small business owners work for years building a company with the intention of passing the company to their heirs. They envision future generations owning and operating the company they started.
However, there could be issues related to transferring a company to heirs. Is there someone in the family willing and capable of operating the business? What happens when more than one family member wants to take over the company? Will family members own equal interests in the company or receive equal distributions of profits? These questions and many other questions need to be addressed and discussed as soon as possible so you can develop a business succession plan in the best interests of all family members.
Option Two: Sell The Company To A Key Employee Or Business Partner
If no one in your family is willing to take over the company, consider selling the business to a key employee. Several options exist for selling the company to a key employee, including financing the sale over several years as you train the employee in all aspects of the business operation. You can also guide your successor in obtaining a business loan to finance the purchase. There are several ways to finance the purchase.
If you have a business partner, you may not have a choice for how to transfer your interest in the company. The partnership agreement typically dictates how the partnership interest may be transferred when a partner exits the company.
Option Three: Sell The Company To An Outside Purchaser
Selling the company to an outside purchaser may be one of the best options you have to maximize the value of your company for yourself and your heirs. However, locating a willing and qualified purchaser for the company might be difficult. When selling to a third party, you need to take numerous steps to prepare the company for sale, including organizing books and records, preparing a business valuation, gathering documents, streamlining operations, and analyzing weaknesses that must be addressed before marketing the company. A Maryland business attorney can be helpful with many tasks.
Option Four: Close And Liquidate The Company
It is necessary to perform many of the same tasks when liquidating your company as you would were you selling the company to a third party. Maximizing your profits requires some advance work.
You need a business succession plan. The business succession plan is a roadmap for achieving your goals, regardless of the option you choose for exiting your business.
Start with a Business Valuation
One of the first steps you want to take when developing your business succession plan is to conduct a business valuation. A business valuation is beneficial regardless of whether you intend to sell to a third party, liquidate the company, or transfer the business to a family member.
Hiring an experienced business valuation expert can provide the most accurate valuation for your business. Most business valuations are based on several factors, including but not limited to revenues, earnings potential, assets, debts, goodwill, and current market value.
Business Succession Planning Checklist
A business succession plan is a document that guides you through the change in ownership of your company. Business succession plans that are well-crafted include several sections that cover many topics and information.
Of course, your business succession plan is tailored to your needs and company. It will serve as a roadmap for your company. However, before you finalize a business succession plan, you must tackle key issues.
A checklist of matters to be addressed when developing a business succession plan include:
❏ List of your short-term and long term goals for your company, your personal finances, and your personal life.
❏ A list of potential successors, including descriptions of each successor’s strengths and weaknesses.
❏ Timetables for various events and the succession.
❏ A list of potential options for exiting the business, including descriptions of each option’s strengths and weaknesses.
❏ Standard Operating Procedures (SOPs) for the company, such as a copy of the employee handbook, company policies, procedure manuals, etc.
❏ Formal business valuation by a business valuation professional.
❏ Description of key employees, officers, and managers and their roles and duties.
❏ Potential solutions and options for financing the transfer of the company to another owner.
❏ Analysis of tax consequences of each transfer option.
After addressing the various matters and issues related to transferring or exiting your business, you can develop a detailed business succession plan based on the option you choose for exiting the company. Most comprehensive succession plans include sections with alternative plans if something occurs that renders the preferred succession plan impracticable or unfeasible.
What Is Family Business Succession Planning?
Many small businesses are family-owned and family-operated. Business succession planning is similar for family-owned businesses, but there are a few more considerations that an owner may need to address.
For instance, if the business is being transferred to heirs, how will the transfer impact estate planning? Do your estate plan and the estate plans of your heirs need to be updated to minimize the impact of inheriting a business interest? How will the transfer of the business impact estate taxes and gift taxes?
Business succession planning for a family business often involves a great deal of financial security planning for the owner. Incapacitation planning and retirement planning are major issues to be addressed when deciding how to transfer a family business.
Additional issues to be addressed when developing a succession plan for your family business include, but are not limited to:
The level of retirement income the owner requires to fund the standard of living he or she desires during retirement.
How the transfer of the business impacts the successor owner and other family members.
Coordinating the intersection of the family component with ownership and management of the business. The family component can have a significant impact on business ownership and interest, depending on how many family members are involved or want to be involved with the business.
How do conflicting personalities and personal goals impact a family business succession plan?
What impact does the various expectations and work ethics of specific family members have on the business?
Which family members will receive compensation and benefits from the business? Who will share in the net profits of the business?
What is the timeline for business succession? The longer a family waits to develop a business succession plan, the more limited their options might be for transferring the business to the next generation.
How are spouses treated? Are they permitted to own or inherit a share of the business? Can they work for the business?
When completed, a business succession plan should resolve how to value the business, identify future owners and managers, maintain the loyalty of key employees, and treat all family members fairly, regardless of their level of involvement within the family business.
Family Business Succession Planning Best Practices
Succession planning takes time. All companies can benefit from beginning succession planning early. However, because family dynamics can affect business succession planning, the owner of a family-operated business may want to begin discussions related to business succession immediately if a plan is not already in place.
A few key elements to remember that can help you as you develop a business succession plan for your family business include:
Start a conversation. Your children may not want to take over the family business. You may have another family member in mind to run the company, but your children may assume that they would inherit the family business. You need to start a conversation with your family to gain the information you need to develop a business succession plan.
Try not to allow things to become “personal.” Family businesses are personal. However, try to keep underlying conflicts and emotions out of business discussions. You and your family need clear minds so you can be objective about the best ways to ensure that the family business continues to be a profitable asset for your family.
Accept that your children or other family members may have a different vision for the company. Accepting change is part of transferring a family business to the next generation. Your children may have great ideas about how to take the company into the future.
Keep it simple. Only include what is necessary to avoid confusion.
Make transparency a priority. If some family members feel as if they are being excluded, it can cause friction with the company and the family. You do not want to overlook the valuable insight and talent available within your family that can benefit your company. It is not always necessary to go outside the company to locate the talent and skills you need.
If a family business does not have an attorney on retainer or a general counsel, it can help to retain a Maryland business attorney as a neutral third-party moderator to discuss some of the issues the company may face during succession planning and raise additional legal and tax issues to be addressed when developing a succession plan for a family business.
A Blueprint for Family Business Succession Planning
Family succession planning need not be difficult. You can accomplish in by following five steps.
Step One: Discuss And Establish Your Goals And Objectives
What is your vision for your future and your vision for the future of your company? Do you intend to pass the company to your children or other family members? How will passing the business to your children impact their lives? Are they interested in running a business? Do they have the skills and experience required to operate the family business?
Step Two: Identify Your Successors And Establish A Decision-Making Plan
Identify which family member is best suited to operate the business. Also, identify family members who can serve as managers and supervisors within the business, if applicable. Clearly define the roles and responsibilities of each family member within the business and establish a method of dispute resolution. Decide when and how much to involve each family member and other family members in the decision making process for succession planning and after transferring the business to the next generation. Make a list of active and non-active roles for all family members.
Step Three: Set Up Your Team Of Advisors
If you do not have an attorney, accountant, and financial planner, now might be the time to hire them. Your team of advisors can help ensure that you have addressed each legal, tax, and family issues necessary for a successful transition. They can also be instrumental in the next step of the process – creating your business succession plan.
Step Four: Create A Business Succession Plan For Your Family Business
It is time to put everything into writing. Create your business succession plan. Key sections of the family business succession plan should cover topics such as:
Key Personnel Changes
Standard Operating Procedures (SOPs)
Legal Registration Requirements
Financing options, if applicable
Creation of Necessary Legal Documents, such as a Buy/Sell Agreement, Trust Agreements, Transfer Documents, etc.
Risk Management and Contingencies
Implementation of the Succession Plan
Step Five: Review Owner And Successor Estate Plans
Owners, successors, and other family members should consult with their estate planning lawyer to ensure that their estate plans minimize taxes, protect company assets, and facilitate the efficient and expedient transfer of the business to heirs upon their deaths.
How Can a Business Succession Planning Attorney Help?
Consulting a Maryland business attorney regarding your small business succession plan is beneficial in many ways. Kirt Walker, president & COO of Nationwide Financial, said, “The most successful business succession plans involve an attorney, advisor and accountant in the process from the start. It’s about protecting and continuing the owner’s life work and legacy.”
Unfortunately, almost one-half of the small business owners with a succession plan did not discuss their plan with an attorney or financial advisor because they did not believe it was necessary. According to Walker, “Business owners spend so much time and energy building a successful business and they need wise counsel to prepare for transferring a business, establishing a true value for the business and identifying how the seller should be paid for his or her interest. The time to do all of this is not in the middle of a crisis, when you have zero leverage.”
As an experienced Maryland business lawyer, I agree. It is crucial that you have an experienced advisor guide you through all aspects of business succession planning. While business succession planning need not be difficult, it can involve complex legal, tax, and estate issues. Failing to address these issues correctly could create significant problems for your heirs and your company.
Regardless of whether you are a sole proprietor who wants to ensure your children receive a viable business with potential for continued growth or you are the head of a family-operated business, your goal is to develop a business succession plan that protects your company and the people closest to you while providing for your retirement and exit from the company. A Maryland business lawyer can help you develop a plan that helps you achieve your goals.
Contact Steve Thienel today.