Have you recently asked yourself whether your business is prepared for the next generation? As a business owner, you know the importance of planning ahead and tackling unexpected challenges, which is why having a viable succession plan is key to securing your business’s future.
A succession plan is essentially an outlined exit strategy that ensures a business can survive and prosper when the current owner is no longer in charge (due to retirement, untimely death or unexpected disability).
A common misconception is that succession planning is an all-or-nothing situation where the leaving owner gives up all control and income. However, with proper planning it’s entirely possible to create a succession plan that transfers business ownership to an eventual successor without losing input or income and retaining the opportunity to continue building a legacy.
Even if the next chapter of your business isn’t on the forefront of your mind yet, there are still crucial reasons why you shouldn’t put off creating your plan. Below are a few ways succession plans play a vital role within a business:
- Ensure financial security in retirement: Research has shown that few business owners participate in retirement plans, and many have sacrificed personal savings in order to invest in their businesses. As a result, there are many owners who have a majority of their wealth tied to their business.
- Provide support for family members: In the event of an owner’s death or unexpected disability, a succession plan can help ensure family members have access to funds or liquid assets.
- Minimize taxes: Without a proper plan in place, estate taxes, income taxes and other costs can be significant, resulting in unnecessary stress on the business and an increased chance of failure.
- Take care of existing workers and community: With adequate planning comes an increase in the probability that your business will achieve sustained success, continuing to employ existing workers and benefit the community.
- Increase the current value of the business: A well-executed succession plan makes a business attractive to potential buyers or lenders.
The benefits of a well-defined succession plan are clear, but taking the time to start one is where many business owners struggle. Getting a plan on paper doesn’t have to be overwhelming. By following these steps, you can kickstart your plan and position your business for continued success:
- Identify your goals: Developing a plan becomes easier once you set objectives. For example, what level of involvement do you want in the business? Do you want future income from the business for you and your family?
- Outline steps to pursue your goals: There are several strategies to efficiently reach your identified goals. These may include buy/sell agreements, gifting shares, establishing a variety of trusts, or creating an employee stock ownership plan (ESOP).
- Implement the plan: As you begin to implement your plan, be sure to review it on a regular basis to ensure the plan remains relevant. Life changes fast, and there are plenty of circumstances that may require plan updates, such as divorce, changes in business profitability, or the death of a stakeholder.
You’ve worked hard to build a thriving business, so why not plan ahead to secure its future? Establishing a plan sooner rather than later could save you money and time in the long run and set your business up for the sustained success it deserves. No matter where you are in your succession planning journey, you don’t have to navigate the journey alone.
At Creative Planning Business Services, we help business owners manage the complex tax rules and regulations often involved with succession planning. Contact us today before moving forward with your succession planning processes so that we can confirm your plan is tax-compliant and identify any potential gaps.