The loss of a business owner through death, retirement or disability is a major blow to
a small business under any circumstances. If there is not a small business succession plan
in place, particularly in a family business the death can be devastating to the company
and the heirs to the estate. Estate taxes alone can deplete crucial cash from the
business. Voting control may be scattered among heirs and conflicts in points of view can
impede the company’s operation and growth. Without a plan, there may not be anyone
available who is readily able to take on the responsibilities of running the company. A
successful company, the result of hard work and financial investment can be damaged or
destroyed by the lack of a succession plan.
Although a succession plan, may be an uncomfortable topic, it is a serious business
issue that must be discussed and planned. Whether the transition is an unexpected one or a
planned transition, such as the owner’s retirement—there is trauma to the
business. Your goal as the business owner is to plan ahead, so any business disruption is
minimized and the equity you hold in the business is preserved for you and your heirs.
Evaluate your current employees’ potential to assume additional responsibility,
particularly as senior leaders of the company. Consider, employees, relatives or
associates, who would be willing and able to take over the business. If you can
successfully identify a chief executive officer and chief operating officer, you are well
on your way to planning for the future. Often in a family-owned business, a family member
will be appointed chief executive of the company. If that individual’s strength will
not be in daily operations, hire a chief operating officer as the decision maker who
manages business operations. Carefully spell out the range of authority and responsibility
for both positions.
Early selection provides time to train upcoming leaders, as you approach retirement.
Your plan should consider the possibility of an untimely demise as well. If no one is
available for your key leadership roles, you must decide whether to have the business
liquidated, sold to outsiders, continued by executors or trustees or inherited by your
heirs. These are decisions you should make for the business. Three crucial elements in a
succession plan are as follows:
- A will covering disposition of the business.
- A buy-sell agreement to outline the disposal or continuation of the business.
- Funding arrangements, such as life insurance, to carry out detail of management success.
Because of the complex tax and legal aspects of transferring ownership of a business,
you should seek professional, legal and financial advice when putting the plan together.
You have a responsibility to yourself and your heirs, to ensure that the financial gains
from your hard work are distributed, as you designate. Tax planning and inheritance
planning are important aspects for consideration as an entrepreneur. Seek out professional
advice and establish the legal documents that will govern the disposition of your estate.
If you would like to discuss leadership succession, succession planning or buy-sell
agreements, contact the SCORE Association (Service Corps of Retired Executives). SCORE is
a nonprofit association dedicated to the formation, growth and success of small business.
SCORE has assisted 3.5 million entrepreneurs. More than 12,000 volunteer, business
counselors donate their time and expertise to counsel and mentor entrepreneurs. For a
referral to the SCORE chapter nearest you, call 1 (800) 634-0245.
Click Here to go back to Resources and Information
