One of the most common questions I receive as a small business advisor is how to properly prepare your business for succession. Succession planning refers to planning to hand off your business to another party.
Common reasons for succession planning can include a business sale, a business partner divorce, premature death, premature disability and retirement. Understanding the importance of succession planning and how to properly implement the strategy will help to protect both your business and your loved ones when you are ready for this transition step to occur.
Have a Plan
The first and most important step to take with regards to a succession plan is to in fact have a plan in place. To many times a business owner or their family are caught off guard without an execution plan in the event of a forced succession. A succession plan should include the following key concepts:
- The strategic long term and short term visions for the business
- The ideal departure plans for the business owner or owners
- Any potential heirs or successors should be identified
- Determining a transition plan for the business to the heir, new owner or otherwise identified successor
- A discussion of any potential tax implications and how to reduce them
Choosing the Right Exit Strategy
There are several possible business exit strategies to consider when developing a succession plan, including passing a business onto an heir or a group of heirs, selling the business to an existing business partner or selling the business on the open market. Each of these choices has both advantages and disadvantages to take into consideration and the type of business and current business structure will often determine which option is the most appropriate.
An important by product of having a succession plan in place is that it forces you to get a business valuation. It is important to note that not all businesses have a concrete value. For example, if someone were to own a consulting business that centered solely around an individual’s key talents and time, its valuation may not exist. So, working through a succession plan will help to place a realistic valuation on the business so that it can be sold or properly valued in the event of a voluntary or forced succession.
Develop a Communication Plan
In some cases, a business owner will have a well thought out succession plan, but it is neither written down nor communicated to the important parties. A succession plan should ideally be prepared by an experienced tax professional and/or financial professional who can work through not only the legal parameters of a succession, but also any tax minimization strategies. Once the succession plan has been professionally written, the plan should be communicated with vital family members, business partners or key employees.
Overall, developing a succession plan for a business is an important step to take. A succession plan can assist a business owner in developing an accurate valuation for future sale and tax valuation, it can help to protect loved ones in the event of a possible forced succession and it can help to minimize possible taxes.
Salim Omar, CPA is the leading tax authority for small businesses in New Jersey. He is the author of the popular book titled, Straight Talk About Small Business Success In New Jersey, now available in all Barnes and Noble bookstores and on Amazon.com. More free information can be accessed on his website at www.OmarGroupCPA.com or by calling (732) 566-3660.