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The Importance of Business Succession Planning

Five Important Business Succession Considerations

Estate planning presents unique challenges to business owners. On top of needing to plan for your family, pass on values, and safeguard your legacy, as a business owner, you have another very important thing that cannot be overlooked: your business!

On top of that, business owners are a unique breed. They are used to putting in long, hard hours. They are used to getting things done and getting the results they desire. They know that no matter how difficult a task may seem, they can accomplish whatever they set their mind to and the job will be well done. While these are all great character traits, they present an unintended result when it comes to estate planning: business owners frequently fail to engage in succession planning and implement a long-term exit strategy until it is too late to maximize the value of their business.

Transitioning a business to the next generation is no small task.

It takes time and considerable planning, particularly if you want to provide for a smooth transition that will help the business grow and maximize the impact that the transition has on your family and your legacy. In an ideal world, this process would start as soon as you start or acquire your business and will be revisited and revised as needed throughout the life of the business.

Five Important Business Succession Considerations

  1. Operations. Is your business set up to operate in your absence? Many businesses start as just being a job for the owner. The owner operates the business and is essential to ongoing operations. Without the involvement of the owner, the business would not function. These types of businesses are harder to transition. But it can be done, with proper planning, if there is adequate time to transition the owner’s role in the business.
  2. Successors. Have you identified successors? Maybe you have child that is already involved in the business and wants to take over someday. Maybe you have key employees that could be groomed to take the reins. Or maybe your plan involves merging with or selling to a competitor. Identifying potential successors early in the life of your business is essential to a smooth transition that minimizes disruption to business operations.
  3. Valuation. How will the value of your business be determined? Valuing a business is a bit of an art and there are many ways to do it depending on the type of the business and the industry. Recent sales of comparable businesses may be a good indicator of value. It may also make sense to determine value by taking a multiple of income or by determining the value of assets. If you plan to sell your business someday, it is a good idea to understand how value will be determined so that you can plan accordingly.
  4. Structure. How will the transition be structured? As you are getting closer to transitioning the business, the structure of the business will become more important. The structure of the transaction can be driven by many factors, including the business’s entity type (C-Corp, S-Corp, LLC, Partnership), number and relationship of the parties involved, ongoing employment or consulting arrangements, and tax considerations. Understanding the interplay between these issues will help you make sure that your business is structured in an appropriate way to complete the desired transition.
  5. Financing. How will the transition or sale be funded? Traditional financing is easy, but in many situations, is not an option. As a result, business owners should consider whether they may need to finance the transaction in some fashion and how that will impact their retirement, their family, and their legacy.

If your business, or the value of your business, is an important piece of the legacy that you desire to leave for your family, a business succession plan is critical.  Please contact us to learn more about whether your family and business could benefit from business succession planning.

2020-03-25T09:00:11-05:00 February 29th, 2020|Business Succession Planning, Estate Planning|