By Dan Miller, CFP®
Small businesses serve as the backbone of our economy, as 31.7 million of them exist in the United States alone. And if you run a family business, you understand the importance of preparing and communicating openly with those who are slated to take the reigns one day.
Family businesses actually account for 64 percent of the U.S. Gross Domestic Product (GDP), yet 43 percent of family businesses have no formal succession plan.1 With the day-to-day demand business owners experience, it’s no surprise that succession planning tends to get put on the back burner. Nevertheless, neglecting to focus on succession planning can put business owners and their family members at risk.
Why Is Business Succession Planning Important?
There are a number of reasons for business owners to consider a business succession structure sooner rather than later. Let's take a look at two of them.
The first reason is taxes. Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them. Failure to properly prepare can also lead to a loss of control over the final disposition of the company.
Second, the absence of a succession structure may result in a decline in the value of the business in the event of the owner’s death or an unexpected disability.
The Business Succession Process
The process of business succession is comprised of three basic steps:
Identify Your Goals
When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
Determine Steps to Pursue Your Objectives
There are a number of tools to help you follow the goals you’ve identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts, or even creating an employee stock ownership plan if your desire is that employees have an ownership stake in the future.
Implement the Strategy
The execution step converts ideas into action. Once it's implemented, you should revisit the strategy regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.
Keep in mind that a fundamental prerequisite to business succession is valuing your business.
As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession, consider working with legal and tax professionals who are familiar with the process.