Frequently Asked Questions
What is Business Succession Planning?
Business succession planning is a series of strategic, logistical and financial decisions to ensure a smooth transition of ownership upon retirement, disability or death.
Why is a Business Succession Plan Important?
There is little in the life of a business that is as significant as replacing an owner. Without a well-thought out succession plan in place, you run a high risk that your business will fail because there is no written agreement in place to transfer ownership or appoint a new leader, family members are fighting over control, heirs are unprepared to run the business, or your estate tax burden leads to a liquidity shortfall. By making business succession arrangements early, you ensure a smooth transition and minimize the impact on your business of your retirement, disability or death.
When Should You Create a Business Succession Plan?
The closer you are to retirement age, the more critical the need for a succession plan. Though in reality every business needs a succession plan. You may not be looking to leave your business, but unexpected life events do happen. If you don’t already have one in place you should formulate a plan and exit strategy as soon as possible.
What Are Common Types of Succession Plans?
There are several options to implement a succession plan.
- Leave Your Business to an Heir. This is a popular option for business owners with children or family members working in their organization. As with any major family decision, complications can arise if not planned properly.
- Sell Your Business to a Co-owner. Many business partners have what is called a Buy-Sell Agreement, a contract that formalizes the sale of your business interest to your partner(s) in the event of your retirement, disability or death. Often, the Buy-Sell Agreement contemplates paying for the departing owner’s interest with the proceeds of life insurance policy.
- Sell to A Key Employee. If you don’t have an heir to whom to leave your business interest or a business partner to sell it to, a key employee might be the logical successor. This too would involve a Buy-Sell Agreement.
- Sell to An Outside Party. When there isn’t an obvious successor to take over, you might look to another entrepreneur, or even a competitor. This is easier for some types of businesses than others.