You have spent years building, managing and operating your business. Yet, owners often forget one very important task: succession planning. Whatever your long-term goals may be, it is vital to begin planning well ahead of your target retirement, since many plans take years to effectively execute.
Whether selling your business or transferring ownership to family, a future transition will touch every area of your business – impacting everything from tax liability, to your leadership structure, and daily operations. Below we outline three key advantages to a solid succession plan. Now is the time to consider succession planning, no matter what stage your business is currently in.
From a tax standpoint, a good succession plan will help you realize your long-term goals. At the same time, early planning can minimize income and transfer taxes.
How you structure a transaction will have current and future tax implications. For example:
- Take advantage of current lifetime exemptions and valuation discounts on intra-family gifts of your business to minimize transfer taxes.
- Consider the timing of an anticipated transaction. It may make sense to recognize capital gains now, or defer capital losses to future years when taxes on capital gains are expected to be less favorable
Smooth leadership transition
While the tax and legal aspects of a succession plan are certainly material factors, they are not typically the primary focus. What may matter most is who will succeed you in running the business. While this sounds like a question solely of exit planning, we encourage you to consider factors beyond just your ultimate retirement.
For many small family businesses, this phase begins as early as bringing in children and grandchildren as occasional help when they first begin working. Those in the family who show interest can be taught the intricacies of the business and gradually given authority and leadership responsibilities.
For other companies, recruiting top talent and setting clear milestones for development helps raise the next generation of leadership.
When there is an abrupt change in leadership, organizations often see the exit of many tenured employees. This can be especially true for other leaders in the organization, for whom buy-in of the new boss can be most critical. Losing these team members can cause a real knowledge deficiency. Additionally, finding the right culture fit for your organization may be critical to achieving the next stages of growth. Whatever your talent pool, do not discount the value of working closely with your team and identifying the future leaders.
Minimized disruption to the business
Without a solid succession plan, rest assured your departure will cause stress on your business. Unsettled staff and insecure stakeholders can disrupt daily operations, furthering the financial impact on your business.
A thoughtful and well-communicated succession plan will give your employees confidence in the company (and their jobs), allowing them to continue to focus on what you need from them during and after the transition to keep your business going.
It will also give your stakeholders peace of mind your debts will be settled, or their capital is safe should you retire or fall ill. This in turn drives your company’s value by easing access to the cash you need to grow and invest in your business and people.