Jan 04, 2023
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Creating your own business is a project of love, sweat, and tears. Whether it’s the small family-owned restaurant you always dreamed of having, or a charming motel in the town where you grew up and have now returned to, building and maintaining a small business is a truly impressive legacy. As such, you’ll want to make sure that you create a solid succession plan for your business so that your family will be able to carry on the impressive work you’ve started and inherit something they can be truly proud of.
Whether you want to retire and allow a family member to take over, choose to sell it to someone else, or plan for an unforeseen event, now is the time to think about your strategy and discuss it with your family.
It's extremely common for those who own family businesses to put their succession plans on the back burner. You're focused on running and building the business and don't foresee the immediate need for an estate plan. The problem with this way of thinking is that if something should happen, a large chunk of your business might be lost to fees and taxes, or there may be a power struggle among your heirs as they try to determine what's next.
These impacts have ripple effects that extend to your employees as well. It can threaten their job security when their employer goes through sudden and rapid changes. These are only several reasons you should create a succession plan now while you're still in control of your business.
Whether you plan to sell your business to someone else or hand it down to family members, you need to have a vision of how it's going to run without you. No two succession plans are identical because business owners have unique goals. You might want to retire at a set date and participate in the transition so that you have more control over the process. Some business owners stay involved in the business while taking different roles after handing it over to their heirs.
It's important to sit down with your family members and tell them your intentions so that they're all on board. They'll know what you expect of them and what parts of the business they're going to be involved in. This prevents legal disputes after you hand the business over or when you pass away.
A business is an asset, and as such it's important that you assess its value. The same goes for any property owned by the business. Properly appraising assets ensures that one of your heirs can buy out the others if one of them is more interested in taking over the business than the others.
It's entirely possible that your children will want to focus on their own career goals and leave the management of your business to their siblings, so planning to give them a way out by selling their interest in the business is important.
The value of your business and any accompanying real estate could impact estate taxes, so knowing ahead of time what your property is valued at will help you account for this. You don't want to make it impossible for your successors to take over your business due to an inability to afford their tax burdens. This often results in businesses being sold to new owners in order to pay off tax debts.
A good succession plan includes determining how to reduce your successor's tax burden when they take over. It's a good idea to discuss your tax planning strategy with someone that has experience in these matters, such as an attorney that works in estate law.
It's impossible to predict the future, so you should have a legally valid will that clearly lays out how the business will be managed once you’re gone. It’s good practice to ensure that your heirs are all aware of the conditions stipulated in the will in order to avoid any surprises down the line. A will should be updated frequently, particularly after significant life events like marriages or births.
Here are a few mistakes you should avoid when you're creating a succession plan:
If you have two or three people in mind for a position after your departure, this can create an environment where all of the candidates feel they need to prove themselves. While this may drive some people to succeed, it can also result in bad blood. The person who doesn't get the position might leave the business in protest.
You want to bring your successor up to speed so they can manage the business effectively. However, you need to cope with the reality that the person who takes over isn't going to see everything the same way you do. Prepare for your successor to go their own way and use their own skillset to manage your small business when you leave.
When you're putting together a succession plan for your business, keep in mind that the changes you implement have an impact on all of your employees. What is right for you or your family members might not be the best thing for the long-term direction of your business. If your business loses key talent after your departure, it could be catastrophic to everyone involved.
The best way to manage this challenge is to consider what your business needs most moving forward, and to choose a successor who has the skills and mindset to address those problems.
If you’re feeling a bit lost in regards to your succession plan and would like an expert opinion, we’re here to help. Get in touch for a free consultation with ClearEstate to see how we can help you plan for the future.
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