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If you were to pass away suddenly, what would happen to your business? Are you ready to hand it over to a family member, partner, or trusted employee? If your answer is "no," you're not alone. Learn how having an outlined succession plan in place for your small business can help secure your legacy and a smooth transition.
As a business owner, you need to take proactive steps to help ensure that your business continues after you pass—or completes an orderly closing. You can use succession planning to guide the business into the future, strengthen your company's bottom line, and help secure your legacy.
A succession plan must have several elements so that someone intimately familiar with the business, as well as a complete outsider, can fully understand and execute it. Here are some key steps to get the process started:
Now is a good time to audit personnel and their job descriptions, including duties, expectations, and performance criteria. Formally designate someone who can show the way in your absence. If each critical position relies on the deep knowledge of only one person, that's a weakness in your knowledge chain. Taking the time to cross-train employees is an important step to ensure a smooth transition down the road.
Could a new leader, or the entire team, step in and keep the place running if you were suddenly out? Make sure you have readily accessible, updated information on your business's strategic plan, day-to-day operations, emergency procedures, vendors and other important contacts, and anything else required to keep the wheels in motion.
Whether you want to pass the business to heirs, sell shares to a partner or employees, or put it up for sale entirely, you should put the terms in writing and have them reviewed by an attorney. Your document should also include provisions for funding the business: Will it be a hassle-free transfer of assets? Will there be capital to buy out heirs that comes from a loan, an insurance policy, or selling assets from another source?
Having an insurance policy in place may also be a good idea. Life insurance funds can be earmarked to meet your business obligations, and they can help your successor fund the purchase of your business through a buy-sell agreement.
In order to avoid legal disputes, hurt feelings, and undue chaos, it is important to communicate your wishes in advance, so that family, co-owners, employees, and other stakeholders know what to expect in the event of your absence or death. A difficult conversation before an unexpected event can save untold confusion afterward.
Even a carefully developed plan is likely to require tweaks as your business evolves. New technology may impact operations. Key personnel may come and go. Your insurance needs may evolve. Laws and local regulations may affect operations and products. A family member who had an interest in taking over the business 15 years ago may feel differently now. The best way to hedge against an outdated succession plan is to think of it as a living, evolving document.
To help ensure a smooth transition, you can put your wishes in a will or trust that can't be dismantled by survivors, partners, or employees who may have other ideas or understandings about your wishes. Wills are the most fundamental estate-planning tool. They give clear directions on how to manage or distribute your assets if you pass away. A revocable trust is a more common way to maintain continuity in a business. The trust holds your assets while you're alive, and in doing so helps streamline the transfer of your assets in a way that allows your heirs to avoid lengthy legal proceedings and court fees.
Taking over a business after the owner passes away or is incapacitated, can be emotionally painful, and can also put the business at risk. Even if you plan to leave your business to your spouse or to another family member, you will need a carefully written and organized succession plan to ensure that the business you’ve worked so hard to build survives and stays successful well into the future.
Success!
Neither New York Life nor its agents and affiliates provide personal tax or legal advice. Please contact your legal or tax advisor to discuss how the general concepts in this article apply, or do not apply, to your circumstances.