Succession Planning Toolkit
Overview
What is succession planning?
Succession planning is creating a plan for someone to either own or run your business after you exit the company, retire, become disabled, or die. It is the process of passing control of the business to others and it includes all aspects of a small business owner’s life: business and personal financial planning, management succession planning, estate planning, and ownership transition planning.
Planning for succession ensures that the owner’s goals shape the tools that are used, not the other way around.⁸ Although it’s a difficult topic for many people, the succession planning process provides the necessary information needed to make your next venture a successful one. Planning provides you the flexibility needed in making important decisions on your own timeline and retaining the maximum value for your business.
Why is succession planning important?
It’s important to know that even if business owners do not have a formal plan in place, their state government has a plan for them that they likely will not benefit from. An effective succession plan allows business owners to carefully consider when and how they would like to retire or step back from the business. Stepping away from your business at its maximum value depends on your ability to demonstrate its worth. There are many factors to consider when transitioning a business, which can be tricky. We encourage owners to begin early and seek guidance from professionals.
If those aren’t compelling enough, here are five more reasons that may convince owners:
Business entities for succession planning
Succession planning isn’t the only factor that determines which structure or business entity suits a company’s long-term needs. Exposure to liability, access to capital, and the personal financial needs of the owner and other stakeholders all enter the equation.¹¹
Your first decision will be to decide if it would be beneficial to change the type of legal entity you currently have before retirement. Options are sole proprietor, partnership, C-corporation, S-corporation, and limited liability company.
Each of these business entity options has pros and cons depending on your concerns with taxes, family dynamics, or your timeline for retirement. Often, the best structure for you becomes apparent when considering how your estate will be taxed after the sale, how complex and expensive it is to set up and maintain, and who will run your business after you’re gone.
Once you have decided on a business entity, owners must decide how to sell the business. Options include: keep the business in the family, use a buy-sell agreement, gifting shares, trusts, management buyout, sale to employees through an employee stock ownership plan (ESOP) or a cooperative, sale to outsiders, liquidation.¹²
