Business Succession Planning
When you started your business, your primary focus was how to survive and turn your company into a profitable venture. After you’ve established your business, the next step is to contemplate the business’ future. Even though your retirement may be far off, it’s worth the time to consider what will happen when you are ready to stop running your business. You can prepare for this transition through business succession planning.
Business succession planning is critical due to potential tax implications. If you die without business succession planning in place, your business will be assessed estate taxes which can be as high as 55 percent. Estate taxes must be paid within nine months which is a huge burden on your business.
You must decide who will run the business in the future when you are preparing business succession planning. Keep in mind that there’s a big difference between who owns the company and who runs the day-to-day business. Be realistic. Often, business owners want their children to succeed them, but that decision is up to the children. If they aren’t interested in the company, don’t try to force them into taking over. An uncooperative family member can ruin the entire planning outcome.
During business succession planning, consider the following questions:
- Do you want your children to take over the business?
- Should it be some children but not others?
- Are your children able to take over the business?
- Should your children own the company but hire someone else to manage it?
- If you die, will your spouse get control of the business?
- If you sell your business outright to your children, will you pay capital gains?
Once you’ve made the ownership decision, it’s a good idea to get a business valuation. Most business owners are shocked to find out how the much your business is worth for tax purposes. The IRS considers the value of your business based upon the “highest and best use”. That means that while you may think you could realistically get $100,000 for your business assets, in the eyes of the IRS, your business might be worth $200,000. The business valuation can help determine the true value of your business. A valuation also provides a starting point for projecting future tax liability if you or your heirs decide to sell the business. Minimizing tax liability is one of the main goals of business succession planning.
Once you’ve determined who will own the business, you need to determine who should run the business. You should consider the person’s skill set but this is not the only important factor. Consider the person’s style. Your goal should be to identify successors who think and feel like you even if they don’t have your exact skill set.
Don’t limit your business succession planning to people outside the company. Often, the best successors are already working for your company. The key to successful business succession planning is to find someone who understands your goals and principles. Employees must trust the successor. Once you’ve identified this person, you will need to work with him or her to prepare them to take over the company. .
Communication plays a critical role in succession planning. You will need to communicate your choice for a successor to your employees and your customers. Be consistent. You should support your successor through both your words and actions. This will take time, but the time and effort you put into support will help make the transition easier for everyone involved. Your successor will be much more effective in his or her role and will be in a position to help the business grow in the future.
There a variety of tools you can use in business succession planning to prepare for the future. These include private annuities, trusts, life insurance, buy/sell agreements and self-cancelling annuities. It’s important to seek appropriate professional assistance during business succession planning because there are many potential hurdles and pitfalls during the process. Work with a team of legal, business and tax advisors to help you prepare a plan for the future.
There are many ways to accomplish the succession plan for your business including trusts, private annuities, life insurance, buy sell agreements and self-canceling annuities. But be careful when doing your business planning as with the many ways to effectuate your plan come many hurdles and potential pitfalls. Be sure to seek appropriate professional assistance from your legal, business, and tax advisors.