Business Succession Planning

Business Succession Planning

by Ronald P. Hammer


Every business owner plans for "success". However, many fail to plan for "succession" soon enough. Far too often successful businesses fail, or a least flounder, at the time of change in business ownership. There are many reasons for this, but often the source is a failure to plan far enough in advance for the transfer of ownership.

So when is the right time to plan for succession? Ideally, before you start the business, because the choice of business entity can have an effect upon the method of transfer and can also have tax implications. Realistically, planning for succession should begin as soon as the owner recognizes that he or she will want the business to continue, after his or her retirement.

There are a number of factors which need to be considered. First, will the business have value without the owner? Some business' are basically the personal effort of the owner and may not have a significant value beyond the work product of the owner. Most businesses, however, have equipment, inventory, talented employees and a loyal customer base that make it possible for the next owner to continue the success of the business.

Second, who are the likely business successors? Sometimes the new owner is right there in front of you, as a co-owner, employee or family member. Other times it is a competitor, and many times it is someone you don't yet know. Identifying your potential market is always an important step in any sale.

What will be the economic and tax implications of the transfer? Will you be able to afford to transfer your ownership interest in the business and live off of the savings and retirement benefits that you have accumulated? Or, will you need to continue to draw a salary from the business? How much money will you have left after you pay income taxes? These and other related questions must be answered before any successful transition can occur.

When do you want to transfer the business? Some people want to retire early enough to enjoy a long and healthy period of retirement. Other people, never want to give up control of the business. If you are not realistic about this, there can be many problems after the transfer has occurred.

These are some of the basic questions that need to be addressed before any of the actual details of the transfer, such as price, closing date, payment method and documentation can begin to be addressed. These are not decisions that can be made quickly or without the input of others.

A successful transition of a business involves many months of planning and no small amount of anxiety. The transferring owner will almost certainly need the input of their immediate family and will want to assemble a professional team to assist in the many technical details. That team will have at its core an accountant and an experienced business attorney. Other professionals are often involved, including the commercial lender, insurance agent and a business broker.