Business succession planning is part of an estate plan and is essential for anyone who owns a small business. Typically, the business is the largest asset in the owner’s estate and special planning needs to be done proactively to protect it and follow your wishes. Without business succession planning, it’s unlikely that your business will survive to the next generation or sell for its true value.
Here are six business succession planning mistakes to avoid:
1. Waiting too long to plan - An ideal succession plan requires laying the groundwork over many years. The initial steps may only be a few weeks or months but it is recommended to begin the planning from the day you start the business. How you want to exit the business tomorrow strongly influences how you structure and operate the business today.
2. Assuming the children will take over the business - Talk to your children to determine what they really want. Learn their desires as soon as possible in order to pursue other avenues if necessary, such as selling to an employee or partner or finding an outside buyer.
3. Dividing the business equally among heirs - Equitable doesn’t have to mean equal, and in the case of a business, establishing an equal partnership among heirs can be a recipe for disaster. As an alternative, determine which child has the talent and genuine desire to run your business. Then, plan a way to leave your other children non-business assets such as proceeds from life insurance or money in investment accounts.
4. Overlooking the possibility of a disability - Most business succession plans address the owner’s retirement or premature death. However, many overlook the possibility that the business owner could become disabled and no longer able to run the business. A good succession plan addresses this possibility using disability insurance and written instructions on who will be in charge and who will fill other responsibilities.
5. Failing to fund the succession plan - If your plan is to sell your business to a family member, partner, employee or outside buyer at your death, disability or retirement, how will they come up with the funds to purchase the business? Loans and cash are two options, but also analyze the pros and cons of using life and disability buyout insurance to fund a succession plan.
6. Planning alone - Business succession planning is complicated. The tax issues alone should send you to a CPA or tax attorney for expert advice. In addition, consider working financial advisor who will coordinate all of these resources to create a cohesive plan. A qualified Certified Financial Planner should also be willing and able to lead family meetings to ease family conflicts and provide a knowledgeable, objective perspective.
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