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.
- Define your long-term personal and business goals.
- Develop a management plan for the business.
- Design an estate plan to transition ownership of the business that meets your goals.
In this article, we focus on the second step in the process.
STEP TWO: Develop A Management Plan For The Business:
Who is going to run the business when you are gone? Is there a key employee or family member who can step up to the plate? Is your leadership team ready to take over? Will your family have sufficient liquid resources to hire someone to replace you? The worst-case scenario is a premature death of the owner. Your plan must take that into account.
The second step involves mapping out the future management structure of the business. For many business owners, it is difficult to give up control and transition from the day-to-day operations of the business. However, whether management of the business will fall into the hands of the next generation or into the hands of key employees or both, it is essential that you plan ahead and learn to delegate the work within the business. It may take a few years to train the successor management team. A gradual transfer of leadership will give your successor time to grow into the role and ensure that he or she is qualified, possesses the requisite skills, and very importantly, has the support of other key employees and family members in the business.
To assist your successor during the management succession period, you may consider establishing an advisory board. An advisory board may consist of the business attorney, accountant, financial advisor and may include other business owners. The advisory board serves to provide counsel to the successor and provide strategic planning for the continual success of the business.
A succession plan must also address methods to guarantee that key employees will remain with the business upon your death, disability or retirement. An employment agreement, for example, establishes the key employee’s job responsibilities, compensation and benefits. The agreement may also outline incentive compensation, a profit sharing plan and include a non-compete clause. To safeguard against financial loss due to the unexpected absence of a key employee, your business may also purchase key person life insurance, disability insurance, or both.