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Business Succession Planning

There is a 100% certainty that a business owner will transfer ownership or a business. The question is whether it will be on the business owner’s terms or someone else’s. Having an established business succession plan ensures the business will transfer based on an owner’s wishes.

Succession planning requires a clear understanding of the business – how the business operates, the risks – supply chain, competition, etc…, challenges, core value, and most important customers (both who and why). Having a clear understanding of the business enables one to guide the business for future growth. Knowledge the present-day business and future business enables you transfer the knowledge and expertise to those who come after you and ensures the longevity of the business.

Having a plan for a retirement of key employee and for an unexpected event such as the death, early retirement due to a health issue or incapacitation of a key employee is vital for the longevity of a business. Not only is it important to identify employee who can step immediately after an even, it is also important to clearly define how and to whom the departing individual’s ownership stake transfers. An undefined price methodology may delay how an ownership stake is valued and can lead to prolonged litigation to the detriment to both the leaving owner and company. Business succession in a family-owned business adds family dynamics to an already complicated process, e.g., what if one child is actively participating in the business and another is not? Succession planning for a small nonprofit presents the unique challenge of identifying individuals who share the same passion and dedication as those retiring and, whereas retiring from a for profit entity, selling one’s ownership stake provides additional retirement funds, there is no ownership.

Privately Held Business
Small business owners have multiple options when exiting a company, such transferring to a third-party, to a co-owner, or key employees. With proper planning, these options are available both for a planned retirement as well as a an unexpected, forced retirement such as death or incapacitation of a business owners. Pre-planning enables business owners to utilize financial vehicles for buyout purposes and train a new owner for a smooth transition. Below are some key items to identify when developing a business succession plan for a privately held business are: 1. The buyer (Employee, Partner or Third-party) 2. Company Valuation (Establish a clear way to value the company) 3. Funding (How will the purchase be funded?) 4. Employees (How can you ensure employees will remain with the company?) 5. Tax implications (What are the tax implications as a result of the transfer/).

Family-Owned Business
A family-owned business is like a privately held business with the added complexity of family relationships. When transferring ownership to a family member an owner should also consider the impact the decision will have on the rest of the family. For example, transferring ownership to multiple children when only one child is actively involved may lead to resentment. Alternatively, if non-active children are accustomed to receiving dividends, what happens if the business needs to reinvest the funds instead? Financing the transfer of a business to a child may also present additional challenges. An owner may be open to alternative financial arrangements that would not be considered when transferring to a third-party such as a personal loan. What will a previous owner do if the transfer was financed through a personal loan and the business fails and the previous owner depended on loan payments for retirement

Non-Profit
A non-profit may have additional challenges when developing a successful business succession plan. Whereas ownership of a for profit company has value and can be sold to a new owner creating value for both the retiree and new owner, a non-profit doesn’t have owners. Often in a small non-profit, those running the organization are passionate about the cause and put as many hours in as a for profit entity, at a reduced compensation. In addition to the challenge of identifying a passionate successor who shares the same beliefs as a current owner, it is often difficult for an owner who has dedicated his or her life to an organization, to relinquish control of running the organization.

Summary
Establishing a business succession plan enables a business owner to control and direct transferring a business to new ownership. Without a business succession plan, control of the transfer is given to a third-party. Some benefits of establishing a business succession plan can include: ensuring a business survives and grows, maintaining family or business partner relationships, reducing or eliminating estate and income taxes and increasing retirement benefits.