Put the “success” in business succession with these 6 steps

Business succession planning can be a little hard to discuss. Talking about the next steps in life tends to have a particular element of morbidity.

The heavy memento mori vibe aside, every business owner should have some exit plan for their business.

The lack of a business succession plan can create tax heartaches for your family and potentially courtroom headaches. And it can be complicated if you’ve never attempted it before.

So, today’s post will lay out and explain the steps of a plan so you can begin creating yours.

Step 1: Determine your goals and objectives

The business succession process starts with a few questions.

Is the business viable for the next generation?

Who is the next generation? Is it family, employees, or a business partner?

Is it wiser to put your business on the open market rather than hand it to a successor?

These might have simple answers, or they may be complex. But you can’t move ahead without answering them because they serve as the foundation for your long-term goals for the business.

Step 2: Assess the value of your business

This step could be first, depending on the situation. But it is non-negotiable for a good business succession plan.

Without it, your family could be shortchanged on the value of the business.

Hiring a professional business appraiser to determine business valuation is usually wise. Your best bet is to find one with a business valuation certification, such as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), or ASA (Accredited Senior Appraiser).

Once you have a business valuation professional on the line, work with them and your CPA to create a tax-efficient succession.

Step 3: Choose a Succession Plan Structure

Once the successor has been determined, it’s time to create a legal and financial structure that works. This is definitely not back-of-a-cocktail-napkin territory. You’ll need a business attorney who can create a detailed arrangement and the proper legal documents.

They may advise a buy-sell business agreement, a trust, or a gradual transition plan. Just make sure you understand it before entering into any deals.

Step 4: Establish financial arrangements

Determine how the purchase of the business will be funded. Standard options include cash, installment payments, or financing from a bank or third-party investor.

However, depending on the situation, Small Business Administration loans, Employee Stock Ownership Plans, venture capital, and even crowdfunding may be viable options.

The most significant factor in this step is ensuring you, the attorney, and the CPA work closely together to determine the most viable option.

Step 5: Review and update your estate plan

It gets a bit personal here. But you must ensure that any wills or trusts align with the succession plan. The last thing anyone needs is a dispute when you are either incapacitated or gone from this life.

Again, this is where you can lean on your team for help. Make sure your attorney and CPA give you, your beneficiaries, and the business successor(s) a full briefing on the alignment.

Step 6: Communicate the plan

This isn’t a linear step as much as an ongoing effort throughout the planning process. It’s essential to keep all stakeholders aware of what is occurring, even if they may not have a direct interest in the plan. Follow your attorney and CPA’s advice on what to communicate and when. Then, implement that communication as thoroughly as possible.

The Bottom line

Business succession planning is a complex process that requires careful consideration of legal, financial, and emotional factors. So, be sure to onboard attorneys and CPAs you trust and ensure all stakeholders are aware of the process.

With careful planning and hard work, you can generate a happy legacy that could be remembered for generations.