by Bradley Hunt, Attorney at Law
Many small business owners put off succession planning, either because they don’t plan on retiring any time soon or because the process can seem daunting. Succession planning is the process of preparing for the transfer of management and/or ownership of the business. Having a sound succession plan in place ensures the business remains a going concern if the owner retires, faces unexpected health issues, or simply chooses to sell the business. This plan protects employees, clients, and the long-term value of the business.
Succession Planning for Small vs. Large Businesses
Small businesses are particularly at risk if they don’t have a succession plan in place. A large corporation typically has several layers of senior management, a board of directors, and business continuity plans in place. If something happens to the CEO, there may be some immediate impact, but the people and processes are in place to ensure the corporation continues to operate.
For some small businesses, the majority of decisions are made by the CEO or owner. He or she may be the only one authorized to approve payroll or access bank funds. Without a clear succession plan in place, the business may face financial and legal challenges, as well as a loss of direction. If the business was set up as a sole proprietorship, for example, and the owner were to die unexpectedly, the estate – including the business – might have to go through probate before all the details could be settled and business could get back to normal operations. This confusion and time lag could easily cause the business to fail.
Succession Planning Steps for Small Businesses
Here are a few steps small business owners should consider in developing a success plan:
1. Identify one or more potential successors. This might be a family member, a trusted employee, or even an outside buyer. Each option has its pros and cons, and the right choice depends on the structure and goals of the business. Talk to your family. Who has the leadership skills, interest, and temperament to run the business? As proud as you are of the business, you may discover your children have no interest in succeeding you.
2. Begin training your successor(s) as early as possible. They need to understand the in’s and out’s of the business. You should also give signature authority on the business bank accounts to a trusted party.
3. Talk to your business law attorney (and estate planning attorney). If you plan to sell the business, you will need a formal buy/sell agreement. It may make sense to convert the business structure; for example, shift from a sole proprietorship to an LLC or corporation as part of the transition. If the business remains in the family as an inherited asset, you will want to consider carrying life insurance to provide liquidity for your heirs.
4. No matter your choice, there will be legal and tax ramifications based on your decision. Talk to your CPA, too. You’ll incur expenses while developing the succession plan, plus any sale or transfer may result in tax liability on one or both sides.
5. Get the business valued by a professional, ideally someone in your industry. Knowing what the business is worth is essential to any transfer of ownership, whether it is being sold, gifted, or transitioned gradually.
6. Depending on your decision, decide how you will notify your employees, partners, and customers. Have a timeline ready to share and answer as many questions as you can to reassure those impacted.
7. Have a backup plan for your succession plan. Emergencies happen. People change their minds. Having a “plan b” is always a good idea.
Succession planning is not just for those nearing retirement, It is a vital part of long-term business strategy that helps preserve what owners have worked so hard to build. By starting early and planning carefully, small business owners can create a legacy that lasts well beyond their time.
Ready to learn more? Make an appointment with a business law attorney at Brinkley Walser Stoner today.