Most
businesses owners strive to make their company more profitable
and valuable and attempt to do so by focusing solely on running
and growing the business. But, if you own a successful business,
one of the most important things you can do to ensure its
future value and viability is to develop a business succession
strategy.
There
are nearly 24 million small businesses in the U.S. today ,
and most are operating without a succession strategy in place.
In fact, only 45 percent of family-business chief executives
who were age 61 or older and contemplating retirement within
five years had created a succession plan. Considering this
widespread lack of preparation among business owners, it's
no surprise that only a third of privately owned businesses
successfully make the transition to a second generation.
All
businesses, from sole proprietorships to corporations, need
to address succession regardless of size. An advisory team
consisting of your attorney, CPA and insurance representative
can help you through the process and on the road to reaching
your business and personal financial goals.
Here
are six primary steps of the business succession planning
process.
Step
1: Set Your Goals
The
first step is deciding what exactly you want to accomplish.
Among other decisions, you'll need to determine who you want
as your successor, when you want to turn the business over
and how you want the transfer to happen.
In
order to set realistic goals, you will likely need to do some
research, such as determining your company's financial position
within your industry and the economy as a whole. Also consider
what effects a change in ownership and management will have
on the operation and value of the business.
Step
2: Groom Your Successor (s)
Chances
are, it would take some time for your successor to get up
to speed if he or she were to step into your shoes tomorrow.
Think about the responsibilities and qualifications needed
for you and your key employee's successors. Can you establish
a mentor-type relationship with your potential successor to
provide him or her with the skills needed for the top job?
Also, what you can do now to help management retain key employees
once you are gone?
Step
3: Decide how you will determine the value of your business.
Will
you base the value of your business on a fixed price, book
value, earnings or a combination of methods? The valuation
method you select is affected by many factors and complex
tax issues can dramatically affect the actual amount you receive
from the sale or the accepted value (by the IRS) at the time
of transfer. It's also important to consider the impact on
estate and income taxes.
Step
4: Select an appropriate buy-sell agreement.
A
buy-sell agreement is one of the most fundamental pieces of
a succession plan. It is a contract between a seller and a
buyer where the seller is obligated to sell his or her interest
in the business to the buyer who is likewise, obligated to
purchase the seller's interest. Not only does it ensure a
market for the eventual sale of the business and fix the price,
it restricts ownership, such as in the case of divorce, premature
death or disability. Your attorney can advise you on the agreement
best suited for your circumstances.
