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Thinking about succession planning for any business can be difficult for any business owner. However, the topic can be particularly difficult for owners of family businesses. They may have established the business themselves and want to pass it down to maintain their legacy, or the business may have passed several generations. Carefully considering a number of factors can help the business owner make conscious decisions about the future of his or her business.
Considerations
There are several things to consider when making succession plans. For example, who is going to manage the business is one such consideration. The timing is another consideration. The business owner may want to retire, may become disabled or may die while owning the business. A plan must be in place in case any of these situations arise. Additionally, it must carefully be considered how the ownership will transfer, including whether it will transfer by selling the business to someone else or by providing more and more equity at certain milestones. When dealing with family, it is even more important to have a clear plan in place. Difficult family dynamics may be at play with years of events to pull from. Children may be in disagreement about what is fair. The family may also have difficulty discussing end of life plans. Other considerations include:
Sole Proprietorships and Partnerships
Another important consideration concerns sole proprietorships and partnerships specifically. In these business structures, the owner does not have a distinct identity from the business. Therefore, the assets of the business are absorbed by the owner and cannot be willed or deeded away. Individuals who want to avoid this issue may decide to form another corporate structure, such as an LLC or corporation.
Ownership
The business owner must carefully consider who should be the next owner of the business. Often, the business owner may decide to split the business into equal shares between his or her children. He or she may decide to split the business in a different way, however. It requires careful thought to think about who should be the next person to carry the torch.
Management
Another important consideration is who will manage the business. Ownership and management are not necessarily the same. The business owner may want his or her family to be able to receive the profits and financial gains from the business but may think someone else should serve as the chief manager of the company. The business owner may decide to pass the management to one child or other person that he or she believes can effectively lead the business. His or her other children may be busy with their own careers and families and may want to pass management to a child who wants to manage the business.
Tax Consequences
Another important consideration when planning for the future is the potential tax impact. The goal of the business owner is often to minimize the tax impact at the time of his or her death. Business owners may take certain action such as exchanging their common shares for preferred shares that have a fixed value that is equal to the value of the common share. This allows the business owner to potentially pass future tax liability to the grantee while retaining ownership during his or her lifetime.
Timing
Business owners often hold off on succession planning. Some may begin five to ten years before they anticipate a change. However, the end should often be considered at the beginning of the business. Additional time can help establish a smoother transition for the business.
Family Preferences
Another important consideration is the actual preferences of the people who may stand to inherit the business. Business owners may wish to involve their families in discussions regarding business succession. Having the input of family members can take into consideration the ideas, life plans and thoughts of individuals rather than imposing an unwanted role on family members. Additionally, such conversations can help determine the skill types of the individuals who may have the business turned over to them. This can help the business owner make important decisions regarding management roles. Another family member or individual may have the skillset to be a success at the business. The business owner should carefully consider the strengths and weaknesses of each person that he or she would like to serve as a successor.
Legal Assistance
A business lawyer may be able to help a business owner to develop a thorough and detailed succession plan.
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Considerations
There are several things to consider when making succession plans. For example, who is going to manage the business is one such consideration. The timing is another consideration. The business owner may want to retire, may become disabled or may die while owning the business. A plan must be in place in case any of these situations arise. Additionally, it must carefully be considered how the ownership will transfer, including whether it will transfer by selling the business to someone else or by providing more and more equity at certain milestones. When dealing with family, it is even more important to have a clear plan in place. Difficult family dynamics may be at play with years of events to pull from. Children may be in disagreement about what is fair. The family may also have difficulty discussing end of life plans. Other considerations include:
Sole Proprietorships and Partnerships
Another important consideration concerns sole proprietorships and partnerships specifically. In these business structures, the owner does not have a distinct identity from the business. Therefore, the assets of the business are absorbed by the owner and cannot be willed or deeded away. Individuals who want to avoid this issue may decide to form another corporate structure, such as an LLC or corporation.
Ownership
The business owner must carefully consider who should be the next owner of the business. Often, the business owner may decide to split the business into equal shares between his or her children. He or she may decide to split the business in a different way, however. It requires careful thought to think about who should be the next person to carry the torch.
Management
Another important consideration is who will manage the business. Ownership and management are not necessarily the same. The business owner may want his or her family to be able to receive the profits and financial gains from the business but may think someone else should serve as the chief manager of the company. The business owner may decide to pass the management to one child or other person that he or she believes can effectively lead the business. His or her other children may be busy with their own careers and families and may want to pass management to a child who wants to manage the business.
Tax Consequences
Another important consideration when planning for the future is the potential tax impact. The goal of the business owner is often to minimize the tax impact at the time of his or her death. Business owners may take certain action such as exchanging their common shares for preferred shares that have a fixed value that is equal to the value of the common share. This allows the business owner to potentially pass future tax liability to the grantee while retaining ownership during his or her lifetime.
Timing
Business owners often hold off on succession planning. Some may begin five to ten years before they anticipate a change. However, the end should often be considered at the beginning of the business. Additional time can help establish a smoother transition for the business.
Family Preferences
Another important consideration is the actual preferences of the people who may stand to inherit the business. Business owners may wish to involve their families in discussions regarding business succession. Having the input of family members can take into consideration the ideas, life plans and thoughts of individuals rather than imposing an unwanted role on family members. Additionally, such conversations can help determine the skill types of the individuals who may have the business turned over to them. This can help the business owner make important decisions regarding management roles. Another family member or individual may have the skillset to be a success at the business. The business owner should carefully consider the strengths and weaknesses of each person that he or she would like to serve as a successor.
Legal Assistance
A business lawyer may be able to help a business owner to develop a thorough and detailed succession plan.