Who will continue your small business legacy when you’re no longer involved? Perhaps that’s a question you haven’t considered, but you’re not alone. More than half of small business owners don’t have a small business succession plan in place. If you count yourself among this group, don’t worry. There’s still time to outline your small business planning strategies.
1. Identify a Successor
Deciding who will take over your business is a difficult but necessary step. All that you’ve worked to build — such as goodwill in the community and a roster of clients — will be transferred to another person. When considering potential successors, ask yourself if they truly care about the business. Do you have children with expectations of running the business someday, or are they interested in other careers? Take a hard look at not only their interests but also their skills, which can be tricky if you’re evaluating a relative. Separating emotion from business will help you pick the right person for the job.
If you make this decision early, you’ll have time to train your successor. Another advantage to starting your small business succession planning early is that having an exit strategy gives you time to transfer assets in the most tax-effective manner. Tax and estate laws vary by state and can dictate how ownership is transferred. Professional legal counsel is a must.
2. Formalize Your Small Business Succession Plan
Once you’ve identified a successor, you’ll want to make sure their next steps — and yours — are clear. Draw up a contract with legal counsel to define exactly what your succession plan will look like. Not only will it lay out a plan for your family, it will reassure stakeholders and/or investors that a small business succession plan strategy is in place for when you hand things over to the next generation. If you have partners, you’ll need to determine if a buy-out is in the future or if your shares will be transferred to another party. Again, involving legal counsel can also help avoid tax headaches down the road. This is not the time for DIY!
3. Allow Your Successor to Build a Team
Now that you have a successor and a plan in place, you may be tempted to manage the rest of the chain of succession. You are likely overstepping if you try to select a team for your successor. Besides showing a lack of confidence in their judgment, you’re determining their future work environment for them. If you trust someone enough to run your small business, you should trust them to choose their own team.
4. Determine Your Future Role
Perhaps the most difficult decision to make is what role you’ll play once you transfer your business. Will you continue to be involved on some level? If you sell outright, you might have less involvement than if you had stayed on in a more advisory role. Each business is unique. Have a serious discussion with your successor and business partners to determine which path makes the most sense. Making sure everyone is clear on what role, if any, you will play in the company’s future will make for a much easier handoff.
5. Know Your Options
There are several small business succession plans to consider. Take the time to evaluate all the options before deciding which one is the right fit for your business. These options include:
- Selling your business outright
- Transferring your business with a buy-sell agreement
- Transferring ownership through private annuity
- Gifting your business
- Establishing a self-cancelling installment note
Create Your Small Business Succession Plan Today
Your local Farm Bureau agent and advisor can help make sure your business is set up for success with business succession planning. Because when it comes to plans for tomorrow, there’s no time like the today.