Putting the success in succession planning

One in four small business owners have a business succession plan in place, according to a 2013 LegalZoom survey. Owners’ daily challenge of running a business may get in the way, yet developing a succession plan is likely the most important strategy in ensuring the longevity of their firm.

The lack of a succession plan can spell disaster for current and future generations, leading to confusion, dissention among the family and business partners, and potentially a failed business. To ensure the succession plan is consistent with the owner’s vision, it is important that at every stage of business growth, the succession plan is thoroughly reviewed.

Business is up and running

While the timing may vary, companies with a steady income, along with loyal customers and employees, should create a succession plan. If there are multiple owners, the death or retirement of one owner could result in a huge loss for everyone. To minimize this impact, a buy/sell agreement is a valuable tool that defines the value of each owner’s part of the business, co-owner’s rights to buy out shares if one owner leaves or dies, and how any transactions will be funded.

The company reaches a level of maturity

As the value of the business increases, owners should begin to think about whether there is someone in the next generation with the skills and interest to run the firm. If not, training an employee or hiring someone new for the transition may be an alternative. Either way, the individual should be enlisted as a partner and engrained in the business, particularly as the company continues to grow. A will and trusts should be in place to define who will inherit the firm. To be prepared for the worst-case scenario, contingency plans should be created.

The business keeps growing

If business increases dramatically, it is important that the succession plan is relevant and extensive enough to cover the changes. As the business grows, owners can begin to think about the strength of the firm’s management team and look beyond an individual replacement. In particular, all successors should know who would be responsible for making decisions.

Selling the business

Every business needs a well-defined exit strategy. Preparation for a sale is best considered three to five years in advance.

Engaging in wealth transfer strategies will ensure a smooth and tax-efficient transfer, while helping achieve desired succession planning goals. Gifting, grantor retained annuity trusts and selling interest in the business to beneficiaries or trusts are a few options. Proactive coordination with financial, tax and legal advisers will help to determine the most beneficial strategies.

If the business will be sold to a new owner, an independent third party, such as an investment banker, can appraise the value of the firm and help identify potential buyers.

Retirement on the horizon

As retirement gets closer, business owners should make sure their net worth is not tied up in the business. To achieve liquidity and reduce the risk should the business fail, building a liquid reserve fund and consistently funding qualified retirement accounts may be considered.

Above all, a defined set of terms for the transition can ensure the necessary cash flow for retirement.

Cindy Luckman is senior vice president, managing director for The Private Client Reserve of U.S. Bank in Vancouver.

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