For small business owners, planning for succession of the business is often overlooked. Whether it’s simply an oversight or being too busy to seriously consider how the business will continue upon your retirement or a more unexpected life experience, planning for who will take over will help ensure that people you choose will assume ownership and that operations will move forward intentionally and smoothly.
Still, succession planning for small business owners is uncommon. According to a recent survey, nearly 60 percent of small business owners don’t have a plan for what will happen when they chose to retire, sell or otherwise transition from ownership. Many reported they are enjoying running their business too much to think of handing it over to someone else. Some 44 percent said the time to leave seems too far away to take time for the planning now.
While it’s certainly understandable to feel that way, experience shows that planning ahead is not only smart, it can save a business you’ve worked hard to create from failure or poor performance. Developing a succession plan doesn’t have to be hard, with the right professional help. A smooth transition can be accomplished with a few basic strategic decisions.
As with most financial planning, among the first steps is to gather documents, including company valuation information, tax returns and accounting of inventory. Whether you plan to sell or turn the business over to family members or others, the history of how the business has performed will be necessary. It’s also advised that owners consolidate account information, store passwords, bank account information and other key IT information in a secure place. Having a durable power of attorney is also well-advised, as is a life insurance policy.
A second key, financial experts say, is establishing buy-sell agreements. The agreements are legally binding contracts and are typically used to reallocate portions of the business if an owner dies, becomes seriously ill or just decides they would like to sell some or all of the operation. Another benefit of a buy-sell agreement is it sets the firm’s sale price, owners’ share values and who can – or – cannot be a buyer. Having this planning in place can help mitigate problems that could develop within a family or with other business partners.
The sound advice from financial advisors and small business owners alike, is, don’t delay your planning. It can only benefit you and your business to be prepared, whether it’s for retirement or other changing circumstances. If you have any questions about your succession plan or how to begin one for your business, please contact one of our tax advisors. We are always happy to help.