You need a succession plan. Nobody can run their business forever, and when it inevitably comes time to retire, you have one of two options: sell or pass the business on. In either case, you’ll need a succession plan to ensure the right person takes the reigns and that you leave with enough money to enjoy your retirement.
Thankfully, exiting your business is much simpler than starting it. That doesn’t mean exiting your business will be easy. There are still several important decisions to make. In this article, we provide you with a guide for analyzing your needs and determining the right direction for your succession.
Succession Planning at a High Level
At its core, succession planning is making a strategy to exit the business—selling it or passing it on to another person. The goal of a succession plan is to ensure that whatever you decide to do with the business, the transition happens smoothly.
A successful succession plan will:
• Ensure a painless sale or transfer of your business to another person
• Maintain the reputation and service of the business during the transition period
• Create value for all stakeholders
• Make use of any available tax deductions or exemptions
How to Choose the Right Succession Plan
There are several different options you can take when it comes to succession planning.
• You could terminate the business and liquidate all the assets.
• You could sell the company off entirely—to a family member, an employee, another entrepreneur, or even another company.
• You could sell part of the company, but maintain an ownership stake
• You could maintain sole ownership, but pass off management duties to someone else
There will likely be more than one succession plan that works for you. It’s an art, not a science, and like any art, there are a variety of considerations you will want to weigh while designing your plan. Here are some:
Perhaps the most important consideration will be anticipating the value of your business. If it has a very high market value, you might want to cash in on that value by selling it—even just a part of it. If the business doesn’t have a high value yet but it’s still quite profitable, you might choose to keep ownership and simply surrender management duties.
Similarly, you want to think about the trajectory of your business. Do you think the value of your business will continue to grow in the future? If so, you may wish to maintain a stake in the company. If not, you may wish to sell it off entirely now.
Because an accurate valuation plays a critical role in every succession planning, it’s worth seeking a high quality valuation using a proven method. Check out GrowGrade’s free online valuation tool for a place to start.
Family or Employee Interest
Many business owners grow their company at the same time that they’re growing a family. Some hope that their children will even take over the family business one day.
A family business can bring prosperity to many generations—but not all family members want to be involved. If you plan to pass your business down to a family member, part of that plan should be gauging their willingness, and hopefully their excitement, to run the business. Holding a family meeting so everyone has the opportunity to discuss it openly is often worth the effort.
If no family members are interested, you may consider approaching trusted employees. These individuals already know the business and have a stake in its success. This saves you the time and effort it would take to train a family member.
Another key consideration is taxes. Selling the business may result in a satisfying, lump-sum check—but it would also likely face a significant tax bill.
With an effective plan, however, it’s possible to minimize your tax burden. Installment sales, for example, allow you to receive payment for your business over several years. Realizing earnings over several years as opposed to accepting a single lump sum may help you stay in a lower tax bracket and pay less in taxes overall.
If your business is a corporation, you might choose to issue shares. Structuring the transfer as a sale of stock versus as a sale of assets often has significant favorable tax and legal implications.
There may also be tax advantages to structuring your business in a family trust, if you plan to have a family member take over.
The tax consequences of these strategies can be complex and rules will vary by jurisdiction. Make sure you consult a business tax specialist to help you thoroughly understand the tax consequences of all your options.
Future Income Needs
Another important consideration is your own cash flow needs in retirement.
Selling off your business will provide a substantial sum in the short term, but it won’t provide any long-term income. You’ll need to then invest and manage the proceeds. Instead, issuing shares to yourself, if possible, could provide long-term income instead of a single upfront payment.
As always, you need to keep your unique life situation in mind. Think about your income needs for the future, especially for during your retirement. Those needs may help you decide what kind of succession plan is right for you.
Your Personal Needs and Desires
Finally, think about how you want to continue to be involved in the business.
Are you done with it and ready to move on? Or would you prefer to stay involved in some way? For some, staying involved in the business part-time can be an immensely satisfying way to spend their retirement. Others may want to start retirement with a blank slate.
The Right Succession Plan is a Personal Choice
Succession planning can feel overwhelming because there is not a single way to do it. Even the act of selling itself is not binary. You can choose to sell off the entire business, you can sell off only a part of it, or you can choose to maintain ownership and simply transfer management rights.
Ultimately, the variety of options is a good thing: It allows you to choose the strategy that works best for you, avoiding being forced into a cookie-cutter solution that does not work. Regardless of the plan you choose, make sure you start your succession planning knowing what the business is worth. Without an accurate valuation of your business, you’re flying blind. Check out our free online valuation tool today.