Especially for small businesses, succession planning is key to ensuring your company continues to thrive after you move on. As you develop your plan, it’s essential to always keep in mind what is best for your business’ longevity.
Developing Your Succession Plan
There isn’t a single best approach for developing your succession plan. Instead, focus on the unique needs of your business. Here are some of the most common steps in succession plan development:
- Select your successor: Begin examining your current employees and family members and determine who has the right leadership and professional skills necessary to succeed. You should begin this process at least 15 years before you plan to move on from your company.
- Train you successor: Identify the most fundamental elements of success and begin exposing your successor to the various departments in the company. There may be a learning curve, but your successor will gain a deeper understanding of the organization’s functionality.
- Define your timeline: Decide when and how you will pass over control of your company. Attempt to ease your replacement into the role to promote a smooth transition, which is important for acclimating everyone to the change of responsibility.
- Develop a retirement plan: Since you are the leader of your enterprise, your retirement plan is a crucial element of your succession plan. You’ll want to ensure a stable future for your retirement and your company. Plus, having a retirement plan will make handing over the reins a little less daunting.
- Implement your succession plan: Once you’ve made all the detailed preparations, you’ll just have to fully implement the plan. Truthfully, you may implement the plan over the course of several years as you train your successor and prepare the company. Either way, your plan should guarantee your smooth transition out of the company.
Common Strategies for Your Succession
As you plan your succession, you have a range of options available to you, including these six common strategies:
- Granter Retained Annuity Trusts (GRATs) or Unitrusts (GRUTs) allow you to transfer your assets to an irrevocable trust and maintain a steady income for a defined period of time. Following this period or on your death, the trust will transfer to its designated beneficiaries.
- Self-Canceling Installment Notes (SCINs) allow a buyer to exchange a promissory note for a business ownership transfer. The buyer must make regular payments until the seller’s death when the payments are cancelled.
- Selling your business interest allows you to exchange your business ownership for assets or cash. Usually, you can choose to sell before retirement, at retirement, upon death or at some point in between. Your earnings may be subject to capital gains tax, should you sell your ownership before your death.
- Transfer your business interest with a buy-sell agreement that ensures you get fair market value at the time of the official sale. This option is a legal contract that arranges the advance sale of your business interest, which will be enacted on a predetermined occasion like divorce, death or retirement.
- Private annuities allow you to sell your property or ownership in exchange for regular lifetime payments. The ownership can be transferred to a buyer or family member, and the benefits may be transferred to a surviving spouse and until his or her death. You may avoid gift and estate taxes with this option.
- Family limited partnerships require you to form a general and limited partnership with your family. You will then transfer your ownership to the partnership and gift your business interest over time.
Using this information, you are prepared to begin your succession planning process. If you hit a roadblock, consider utilizing a third-party consultant for some objectivity. You might also like to speak with a lawyer to help you navigate intricate legal details.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.