As a business owner, your attention is focused on the here and now – what do you need to do to not only keep the doors open, but to excel in your field? It is not surprising, then, that as many as 72% of small businesses don’t have any form of succession plan in place to handle leadership transitions. But if you are a sole proprietor, or one of a small group of owners, you should also be considering what would happen to your business if something happened to you.
A successful plan may take years to plan and implement, whether you intend to transition your business to a family member or employee, or to sell your business when you are ready to retire.
If you are a professional service provider, your business is likely dependent on, well, you. Managing risk through an operating entity with a liability shield, such as a limited liability company, is key. Professional contracts should also carefully consider what would happen if you become disabled or die and are no longer able to carry out your responsibilities. Your business should be set up, as much as possible, to shield your personal assets, and therefore your estate, from your professional liability, and to insure against future risk.
In a business with partners, a buy-sell agreement is an excellent way to manage risk in the event a partner dies. Will your business redeem your ownership interest, providing liquidity to your estate, or will your partners buy your interest? Life insurance may provide an avenue to provide the necessary liquidity to the business without tapping into working capital. A well-crafted buy-sell agreement will also describe how your interest will be valued, and how payment will be made to your estate.
Family-run businesses have their own unique challenges. A buy-sell agreement may play a strong role in your transition plans, but other practical considerations should also be taken. One generation of the family may have different strengths, communication preferences, and general working dynamics than the one before. Without understanding these differences, and planning for them, it is not uncommon for family run businesses to fall apart after a significant transition. Understanding these changing dynamics and accounting for them in your transition strategy can be the crucial difference between success and failure.
Planning for succession or transition should involve all your trusted advisors.