Your Business Needs a Succession Plan

Running a small business is not for everyone, but younger family members often want the challenge of taking over when founding generations retire. If you're part of a family business, here's how you can work toward continuing the business from one generation to the next, even in times of uncertainty like these.

Start with a Plan

Like everything else in business, you'll prepare best by creating and following a plan. A succession plan lists what events – death, disability or retirement – will trigger the next generation of leaders. It should also determine a valuation method – usually from a qualified valuation professional or certified public accountant – to determine the company's fair value.

Next, communicate frequently with your successors. You may have differences over how to run the business, and you'll need to resolve them—you can't run the business forever. You will want to create a development plan allowing family successor(s) to gain the necessary experience to run your concern. And you may want to begin making shared business decisions that allow your loved ones to get hands-on experience running the company.

Money Matters

While family members are learning all the tricks of your trade, create a buy-sell arrangement that works for everyone. Using the earlier valuation, detail how the next generation will buy into the business. Also, figure out appropriate compensation to leave a loved one who doesn't participate in the business to equalize your estate.

Your sale price and schedule of payments may be included in your buy-sell arrangement, and you'll also address tax responsibilities, the value of business assets, and total liabilities. You may also want to address potential liquidity issues to avoid future problems for both the seller and buyers. Pre-paying the transfer, whether through gradual ownership shares while working together, contributing to a sinking fund, or purchasing life insurance, might help address any liquidity issues.

Begin working toward an agreement as soon as you and your loved ones decide family succession is in everyone's interests, and review your succession plan regularly because change happens. Most importantly, work with qualified legal, tax, and financial professionals to develop a plan that benefits you, your family, and your business.