Why is it important for small-business owners to have a succession plan?
Small-business owners love what they do and plan to work until they are physically unable to. Yet when the time does come to retire, after putting their time, energy and talent into growing their business, owners must feel confident that they are leaving their life’s work in capable hands.
According to a recent study, more than half of small-business owners with a succession plan intend to sell or transfer to a family member, 23 percent plan to transfer to a non-family member and only 11 percent plan to dissolve the business.
Advanced planning can help to determine which decision is right for both the owner and business, as well as help to ensure a smooth transition and a successful outcome.
In addition to who will take over the business, what else must small-business owners consider when planning for their company’s succession?
Business owners need to determine their cash flow needs in retirement and how they will fund their future lifestyle. If the owner and their spouse are dependent on cash flows from the business to fund their future lifestyle, their business succession plan must take this into consideration.
As a small-business owner, when it comes time to start thinking about a succession plan, it can be hard to tackle the necessary questions. You built your business based on goals and personal objectives, so your succession plan must align with those interests.
For example, are you looking to exit your business in a time when the company needs capital? Or do you think that the sale or transfer of the business might change the future growth of the company? Think about who will be taking over the business and how you would like them to manage your legacy.
Further, consider whether you would like a semi-working retirement or one of travel and relaxation. A successful business succession plan aligns your personal and financial goals with your estate- and income tax-planning considerations. A well-thought-out plan should also ensure that the foundational principles of the business and reputation of the founder will continue with the successor.
When is the right time to sell or transfer a business?
When it comes to selling a company, timing is of the utmost importance. You must consider both the current financial status of your company and factors that are impacting its value.
Ask yourself if you are looking to exit at a time when the company needs capital or during a period of growth. Consider factors like the economy, market conditions or other influences. If these external influences are devaluing the company, it may be better to wait until conditions are more favorable.
How can you determine a business’ sale value?
Small-business owners often determine their business’ value based on its financial revenue, profits and net cash flow, return on capital and recent sales of similar businesses. It is crucial to also consider your business’ intellectual property, contacts and other tangible and intangible assets.
Lastly, consider your business’ brand and the quality of its products and services. You should engage a qualified business appraiser to value the business. This will be important if you plan to transfer the business to family members or third parties.
What should be considered when passing a business along to a family member?
When transferring a business to family members, the owner needs to carefully evaluate the roles of the family members in the business.
Some children may have an active role while others do not. Careful planning needs to be done to ensure that the children in the business and those not in the business are treated appropriately. For children that will be involved in the business, getting them trained early on and evaluating whether they have the skills to assume management of the business is crucial.
A family member’s previous experience with the business can help ensure a smooth transition as they are more knowledgeable about the business and better aligned with its corporate culture. Additionally, as small businesses so often depend on strong personal relationships, a family member can help to ease customers’ concerns over the transition.
Developing a plan to transfer the business to children becomes critical in reducing gift and estate taxes. One should consider the state and federal gift and estate tax laws in evaluating which business transfer options are appropriate for your situation. Transferring the business at its lowest value to family members can help reduce potential estate taxes.