By Nathan Vinson, Attorney
English, Lucas, Priest and Owsley
Owning a business is the American dream for many. It’s building something from your own hands that you’ve shaped and created. It’s long hours, and a labor of love – but in the end – it’s yours. And that’s a fantastic feeling if you’ve got an entrepreneurial streak.
But that feeling of ownership is what keeps a lot of business owners from planning for the future. It’s hard to envision a time when your business will go on without you. Your failure to plan for that inevitability is your biggest vulnerability as an entrepreneur, and can rob you of the equity you’ve built over the years of business ownership.
The best succession plan is one that you make before you need it. It’s on the shelf, ready to go, should something happen to you or other key business owners or managers. It is also a living plan, though, that you should review at least annually and update as needed, just as you would with any other estate documents such as a will or trust.
Even if you don’t see yourself ever leaving your business, creating a plan is a good exercise in thinking about the strategy and purpose of your business, your role in it and the importance of having key people to help you execute your vision. You may find this article from the Small Business Administration on how to exit your business helpful.
Choosing a successor
Choosing your successor is the first step, and arguably, the most important. While many business owners envision passing on their business to a child or children, that isn’t always the best option. If your children aren’t currently involved in your business, would they want to be? Do they live nearby? If not, you need to have an honest discussion with them about their future role in the business. Handing off a business to someone who has not been involved previously isn’t advisable, as they will have to learn both the industry you’re in and how your business operates.
You may find that you have a long-term employee who will be a better fit for leading your business into the future – or several who can work as a team.
If you’re having trouble objectively examining the qualifications of each potential successor, including children, talk to a trusted professional advisor, a fellow business owner, member of your board of directors or others who can help you evaluate the strengths and weaknesses of each choice. Don’t just talk to them; listen to what they have to say. They may offer insights and perspectives you have not considered. This piece from SCORE highlights five steps you can take to pass your business on to the next generation.
Choose how you want to turn over the business
The best situation is one in which you sell your business. You will need to place a value on the business. The most common scenario is to sell privately held shares of the business to the new owners. You will walk away with funds for retirement that should be invested. You may retain an advisory role in the business going forward, or you may decide to sever all ties. We see business owners go either way. Understand, though, that if you choose to have an advisory role, your suggestions won’t be binding to the new ownership. They’ll be just that – suggestions – and they may have their own way of doing things.
When do you want to leave?
If you could choose, when would you want to leave your business? Do you have retirement plans in mind? If you want to travel, keep in mind that sooner is better. You will want to be sure that your health and mobility are in-tact for the adventures you’re seeking. Waiting until you’re 70 or older could put your plans at risk.
When you leave is also dependent on how good of a job you’ve done saving for retirement. If you’ve steadily placed funds in retirement accounts and saved judiciously throughout your working life, you’ll have more flexibility. Some people stay working because they need the income, and that’s not what’s always best for your business. Instead, be prepared to sell earlier than you’d like by saving.
The role of taxes
Good tax advice can help you plan for turning over your business to the next generation. Taxes aren’t the determining factor of what should happen, but certainly, taxes play a role in deciding what happens next.
Our attorneys give advice to business owners often on which scenarios may save them taxes and what might cost them, and we’re glad to do the same for you.