3 Essential Steps to Business Succession Planning – Part 1

business succession plan

You are beginning to think about retirement. You have been actively involved in building your business for years and have seen its continued success. You may have a child in the business, or you may have certain employees who want to take over. Perhaps you have neither and are wondering who might want to buy the business. You have heard of an ESOP, but don’t really know what it is or how it works. Your spouse is not involved in the business, but you want to provide for your spouse should you die unexpectedly or become disabled.

This is a common scenario faced by many business owners. How do you leverage the years of hard work you have invested in building a successful business to ensure it continues to flourish through a transfer of leadership to the next generation? Further complications can occur when you wish to transition the business to a child who is actively involved in it, but also maintain proportionate distributions to your other children who are not in the business.

A successful transfer requires intricate planning. Failure to properly plan for a smooth succession during your lifetime can result in monetary losses, lasting damage in family relationships, higher taxes and even loss of the business itself.

Estate planning is an essential component of the succession planning process. The goal of estate planning is to ensure your loved ones are cared for after you are gone and to provide for the management and transfer of your assets including your business, in the events of your death or incapacity, at the smallest financial and emotional cost to your family. Business succession planning integrates estate planning techniques to position the business for continued success when the owner retires or dies unexpectedly.

There are three essential steps to developing a business succession plan. 

  1. Define your long-term personal and business goals.
  2. Develop a management plan for the business.
  3. Design an estate plan to transition ownership of the business that meets your goals.

In this article, we will look closely at the first step.


STEP ONE:  Define Your Long-Term Personal Goals And Goals For The Business:

When you list the long-term goals for your business, consider the what, when, who and how questions.  For example, what is the cash flow and value of the business? How much do you need to retire? When do you want to transition the business? Is there a key employee or child active in the business? How will you accomplish that transition and not upset the family dynamics? Are there competitors or strategic partners who might be interested in buying your business?

The long-term goals you establish for your business will ultimately determine the appropriate financial planning, retirement planning, transition planning, estate planning and tax planning methods to employ. Surrounding yourself with a strong team of advisors to assist you in developing and implementing a sound succession plan is critical to achieving your goals. Your team should consist of an estate planning attorney familiar with succession planning, a business lawyer, an accountant, a financial advisor, and an insurance agent. Together, your team will review your goals and evaluate the present state of your business to forecast realistic and obtainable results and maximize liquidity for your business.

During retirement, you may be dependent on the business to provide you with the lifestyle to which you are accustomed, as well as to provide for your spouse upon your death or disability. It is important to obtain a business valuation to find out the true value of your business. Only then, will you have the ability to make informed decisions concerning your future goals and finances. Additionally, a solid financial plan is essential if the business is to continue to provide income to you and your spouse after the succession.

In the next article we will discuss key considerations in developing a future management plan for the business.

Dan Lynch is a business lawyer and Lisa Goddy is an estate planning lawyer at The Lynch Law Group. They routinely help business owners with the transition of their business. Please contact Dan or Lisa if you have questions about this process. You can reach them by calling (724) 776-800 or via email at dlynch@lynchlaw-group.com and lgoddy@lynchlaw-group.com.
Share This:
Facebooktwittergoogle_plusredditlinkedinmail
This entry was posted in Legal Watch, Business Succession Planning, Estate Planning and Administration and tagged , . Bookmark the permalink.