What preliminary steps can a business take to pass leadership on to potential successors?
If you want to set up a succession plan for your business, you may want to start by conducting a thorough financial assessment of the business, including its debts, assets, and profitability. Compiling a complete picture of the company's value can help you better understand your options. You may also want to think about both your personal and business goals.
It can be tough for business owners to separate their personal goals from the goals of their business. Doing so, however, can help you plan the right time for both you and your business to transfer leadership. Your personal goals might include expectations for retirement, your family, health insurance, and taxes. You may also want to see the business continue to grow, or you may want to stay involved, after you pass on the leadership or get acquired.
What other steps can a business take to prepare for succession?
After deciding on what you would like to happen, making a succession plan can help businesses create a path for future success. Succession plans may also span multiple years to ensure tax efficiency as the business passes to the next generation. This is a reason to start a plan early. Even if it changes later on, or dates get pushed back, a succession plan can also provide protection in case of an emergency.
To prepare for transferring ownership or leadership of your business to a family member or as part of a sale, it can often help to:
- Incorporate or form a limited liability company.
- Transfer assets, such as equipment or trademarks, to the business.
- Transfer real property to the business.
- Appoint a Power of Attorney.
- Train the new leadership.
- Discuss your plan with professional advisors.
A lawyer may help you understand the various options, and their associated risks and outcomes. A financial advisor can help you understand what to expect from a tax planning and retirement perspective. They may also be able to help prepare a budget to paint a picture of the transition's total cost.
When is the right time to start a succession plan?
There are two reasons why it is almost never too early to start planning for succession: First, transitions are not always planned. Even in the unfortunate event of a death, incapacitation, or divorce, many small business owners will want to make sure their business keeps running. Second, a good succession plan can be amended as circumstances change and aspects of the business shift. While objectives may change, a solid succession plan is a foundation for success.
As part of your proactive succession planning, you may identify and train future leaders as well. Guiding key employees, family, or friends into future executive responsibilities helps employees experience a smooth transition. It also gives you peace of mind knowing your business is in good hands when the time comes.
An attorney or financial advisor may help with asset transfers to avoid unnecessary tax penalties. You always have the option to work with a lawyer to ensure you effectively plan for the transition.
What decisions help provide a smooth transition?
There are many decisions that may help make it a smooth transition of leadership when your business changes hands.
First, consider who you trust to hold key positions within the business. If you notice a gap, it may be a good time to hire or train someone to step into a role. You may craft a plan to protect your existing team members, and you can bargain for employee retention in a Buy-Sell Agreement if you choose to sell. You can also retain or include intellectual property like copyrights, trademarks, or patents as part of the sale.
A Buy-Sell Agreement protects your company from future problems if you, as the business owner, want to sell. This document outlines who can purchase your interest, its price, and what happens with your part of the business when you depart the organization.
As part of a proactive plan to sell your business, certain pieces of information may help identify a fair sale price. If certain assets are no longer used, you might consider selling them before marketing your business for sale. When everything is in order, you can conduct a business valuation.
The basic steps of conducting a business valuation can often be more complex than simply adding up what everything is worth. For example, assets may be valued at fair market value, liquidation value, or investment value. Debts, existing contracts, accounts payable, and accounts receivables, and other liabilities, can add additional complexity to figuring out the value. It can often be worthwhile to get outside help with creating your valuation.
Can I change my succession plan?
Succession plans can be changed. The process is relatively simple for small businesses. If you have a board of directors, you may still change your succession plan even if your board has already approved the original plan. If your business has already begun a transition to new ownership, you may wish to consult your Corporate Bylaws on your ability to make decisions at that point in the process. A careful selection of your successors can help ensure a smooth and cooperative process if changes are wanted later, even unexpectedly.
Business succession is an intensive process, but careful planning can minimize complications. When you take the time to think through your goals for the succession process, you can ensure that the transition benefits both the company as a whole and yourself.
If you have more questions about making a succession plan, or preparing your business for your retirement or the next generation, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don't do your taxes™ - Let us do them for you.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.