Most business owners are busy running their business rather than focusing on business succession. Business owners need to be thinking about what will happen to their businesses when they retire, die or become unable to remain active in the business for an extended period.. In my experience, most businesses do not survive to the next generation because the owners do not properly plan. Failure to plan properly can result in unnecessary estate taxes as well as failure to find a suitable successor. It can also cause the company to lose value during the transition that follows a death or retirement.
There are several options when considering who could take over your business:
- Family members are a logical choice if you have an interested relative. Perhaps a child already works for you and is interested in becoming a future owner. You could potentially gift some or all of your business to your child or sell the business with a structure that would provide retirement income while continuing to maintain control of the business.
- Current business partners are also an option to take over your ownership through buy/sell arrangements, which frequently use insurance to fund the arrangement.
- Current employees may be an option, possibly though an employee stock ownership plan.
- An outright sale to another person or company is also an option, typically with fewer tax benefits.
Business exit strategies are a big part of estate planning. Even if you are not planning to stop working, you still need to plan for the day when you are unable or unwilling to run the business.
Common mistakes in business succession include:
- Waiting too long to plan or never planning at all. It is important to create the plan early and allow several years to implement the plan. It also makes sense to periodically review your plan to make certain it still meets changing needs in the business or the marketplace.
- Not planning for equalization among children. You may have a child extremely interested in your business and possibly currently work with you, while your other children have no interest in your business. It would not make sense to divide your business between interested and non-interested children. You would need to plan to equalize your estate by giving other nonbusiness assets to the other children or to fund their inheritance through life insurance.
- Another common mistake is waiting too long to train your successor in taking over the business. It would be advisable to have your successor apprentice under you and begin delegating ownership duties to your successor sooner rather than later.
Some additional things to remember regarding business succession planning are the demographics may not be in your favor when you are ready to sell. Due to the number of “baby boomers,” there could be two or three sellers for every buyer. Economics related to recession and recovery may not be favorable to you. The options to finance the purchase of a business may not be favorable at the time you want to sell. Taxation of the sale of your business may change over time, as well.
Now is the time to meet with your professional advisors to start your business succession planning, if you haven’t already done so. Your CPA, attorney and life insurance professionals should all be included in your plan. TD&T can help you in this process as well, by providing estate planning, business valuation, tax accounting and other relevant services.