Succession Planning for Small Businesses
Individuals often avoid estate planning because they do not know where to start, do not believe that their situation justifies a plan, or simply distrust the entire process. Unfortunately, small business owners avoid making succession plans for their businesses for many of the same reasons. However, the consequences when a business owner avoids this task are magnified, resulting at times in family discord, loss of key employees, diminishment or loss of the business assets, and in the worst-case scenario, legal battles.
Starting business succession planning can seem overwhelming to a business owner, but doing so is not as daunting as it appears and can help avoid negative outcomes.
These five steps can help small business owners begin the planning process:
1. Get organized. Take time now to locate key information about your business (e.g. articles or incorporation, bylaws, minutes of meetings, list of current shareholders or members, etc.). Check INBiz.gov to be sure your business has filed all required entity reports. Organize financial and tax records. Notify a trusted person of how to access this information.
2. Think idealistically about your goals. What do you hope would happen to your business after you pass? Would you want it to continue and grow, or would you prefer that the assets be sold and the proceeds distributed to your beneficiaries after your death?
3. Consider realistic possibilities. What you would like to have happen after your death and what is realistically possible may not be the same. If you would like to see the business continue, have you identified a family member, key employee, or a co-owner who is both willing and capable of carrying on the business? If not, have you considered selling the business during your lifetime to a person who could continue it? Have you planned for how the business assets should be divided among beneficiaries? For example, a family business may have a mix of different types of assets and there may be a reason to leave certain types of assets to certain beneficiaries.
4. Gather information from professionals. Business succession planning can include issues that involve input from multiple professionals, such as attorneys, CPAs, insurance agents, and financial planners. You should begin to talk with professionals who can advise you on the best ways to implement your goals. Often, your attorney can be the key point of contact for this group of professionals.
5. Finalize the documentation for your plan. Your attorney can help you draft and implement the appropriate documentation to activate your plans after your passing. Some common documents for small business owners are buy-sell agreements, transfer on death interests, or amendments to operating agreements, in addition to other estate planning tools, such as wills or revocable trusts.
Business succession planning takes time and requires some tough decisions, but so does building your business in the first place. Following the above steps will help you create a plan that protects what you have worked hard to create and brings you peace of mind.