Succession Planning for Your Family Business

You may be completely wrapped up in running your business now, but someday you’ll probably be ready to step away. Succession planning can help ensure a successful transition.

Who Will Succeed You?

Succession planning begins with choosing someone to take over the business once you’re no longer involved. It might be a child, grandchild, or another relative or a key employee who will purchase the business from you. Transferring ownership to a family member should include a written plan for compensating the business owner, possibly by providing an income stream during retirement.

Grooming Your Candidate

Grooming your successor to take over may take several years, so it’s important to choose a candidate long before you’re ready to turn over the company. Your chosen candidate should become familiar with every aspect of the business by working in different areas or departments. Helping your intended successor build relationships with key clients prior to assuming your role can help ensure a good working relationship and continuity of business.

A Written Plan

Create a document that spells out exactly how the succession process will work. Your document should include arrangements for mentoring the candidate and designate specific employees to oversee the company’s operations and procedures. Identify training opportunities that will help your successor take over the business once you’re gone.

Selling to a Key Employee

Your successor may be a key employee who will purchase the business from you. An independent valuation can help you determine a fair price. You and your successor will have to come to an agreement on how to structure the sale. Common options are an all-cash transaction or installment payments over a designated period.

Tax Concerns

Selling a business can leave you with a large tax bill, so start planning well in advance to protect the proceeds of a sale. Strategies for reducing taxes on a sale include the Qualified Small Business tax exclusion and a non-grantor trust. Your tax advisor can determine if either strategy is appropriate for you.

Choosing a successor for your business can be challenging. Starting the process several years in advance can make the transition easier.