Succession planning is an important but often overlooked step for many small businesses. Surveys have found that a significant number do not have a plan in case of the owner’s death, disability, or if he or she otherwise becomes unable to run the business.
Even if you aren’t planning to retire in the near term, we advise you develop a plan early. Here are some of the steps you should take.
Determine Who Is Likely to Take Over the Business
Common approaches include transferring ownership to:
- A family member
- A partner or employee
- An outside buyer
In the case of family members, this could be as a gift or as a sale, or in some cases, as a combination of the two. Each approach has its own set of legal and tax implications which should be reviewed with an expert before making a decision.
Get a Business Valuation
A business valuation establishes an understanding of your company’s worth. This can be based on assets, earnings, or market value. Besides providing insight for retirement planning, a valuation supports insurance decisions and financing strategies, which makes transitions easier for successors.
Establish Buy-Sell Agreements
Buy-sell agreements create a blueprint for what happens if an owner leaves, retires, or passes away. These agreements are especially important for co-owned businesses, detailing how shares are to be sold or transferred, often with a pre-agreed formula to prevent valuation disputes.
They can also help avoid litigation and ensure family members with a claim to the business receive fair compensation without disrupting operations.
Communicate Your Wishes Clearly
Appoint a Power of Attorney (POA): A POA for property ensures that someone you trust can handle the business’s legal and financial decisions if you’re incapacitated.
Estate Planning: Drafting a will and establishing trusts can clarify asset distribution, minimizing potential conflicts. This clarity ensures the business’s continuity and helps maintain harmony if family members are involved. Consulting with a lawyer on estate taxes and inheritance laws will also protect your beneficiaries from unexpected financial burdens.
Tax Implications
Taxes can have a significant impact business transitions, especially capital gains taxes on the transfer of ownership. Tax specialists can advise you on strategies like estate freezes or setting up trusts can help you defer or minimize taxes on the transfer.
Ready to start developing your succession plan? Contact our expert team at Blackburn today to set up a free consultation.
* Please note that the information in this article is not intended as legal advice, but rather as a general overview on the subject. If you are seeking legal advice, please consult with a lawyer.
