Business succession planning is a critical, but often overlooked, factor in companies having long-term viability. If you are the primary owner and officer of a business, having a successor is even more vital.
According to a recent article in Entrepreneur Magazine, over 25 percent of family-owned businesses lack written succession plans. Even those owners facing their senior years, have yet to create exit and succession strategies.
Use some or all of these suggestions to create a legal, enforceable and workable plan to exit your company or execute a successful business transfer.
* Create a flexible succession plan. Do not design a strategy that is difficult to modify. Family, health and economic conditions can change quickly. Your succession plan should be equally easy–and fast–to modify should situations change.
* If you name a specific successor, be sure you have selected the right person. Should you name one of your children, this factor takes on greater importance because of the potential familial problems that may arise. Naming multiple children as successors may be a perfect solution or an irreversible nightmare. Carefully consider the skills, abilities and temperament of the successor(s) you select.
* Consult your attorney to learn about federal and state estate tax laws you face. You must structure business transfer issues to avoid unnecessary taxation. Your exit and succession strategies should be designed to minimize tax issues and maximize your successor’s ability to continue business operations successfully. Your attorney or tax adviser can provide valuable input.
* Attempt to place a reasonable value for your business. Establishing a fair market value (FMV) on your business may be relatively easy or highly difficult. This could be a dynamic issue, as economies, markets, competition and technologies can change rapidly. Yet, determining what price a “willing” buyer and an equally “willing” seller would agree to is an important consideration. Even if the value changes between the creation and execution of your succession plan, you will have a benchmark to use to modify future company value.
* Plan for potential marital or other deductions. Your attorney may suggest a spousal business transfer to avoid federal, state or local transfer taxes. If your spouse is ill-informed about operating your business, you should consider also naming an operational successor to ensure the company continues its profitable operations.
Your attorney or adviser may suggest other considerations and components for your succession strategy. The critical objective: Have a flexible succession plan. Even a succession plan that needs tweaking is better than no plan at all.
This vital road map can be modified as circumstances dictate. Waiting too long to create a succession strategy, however, could be disastrous for your business. Do it now. Follow your attorney’s advice to design the best strategy for your company.
Ryan C. Young | Richmond, Virginia | Legal Business Succession Planning