Creating a Smart Succession Plan
More than 40 percent of family businesses expect a change in top leadership in the next five years, but 42 percent have not chosen a successor or lack a succession plan. As a small business owner, you've likely spent some time thinking about your own succession plan. In order to develop a transfer strategy that meets your wishes and fulfills the needs of your loved ones, consider three key steps: Choose a successor, reduce your exposure to estate taxes and find a way to fund the transition.
- Choose a successor-Though it's tempting to leave everything to a family member, there may be a better choice. Carefully weigh the individual's ability to keep the business running... to move it forward. It may be a better choice to put an agreement in place to sell the business to a partner and let your heirs use the money from the sale to pursue other interests.
- Reduce Exposure to Estate Taxes-Estate taxes could claim up to 48 percent of the gross value of your estate including your share of the business. In most cases, these taxes are due nine months after your death. This could make it necessary to dissolve or sell your business simply to cover the tax bill. There are ways to reduce this exposure using trusts, family limited partnerships and other arrangements including life insurance.
- Find a Way to Fund the Transition-If you set up an agreement to sell your share of your business to a partner, you need a strategy to fund that agreement. Otherwise, your passing could put undue strain on the business's finances. Many people find that a company owned life insurance policy is an ideal way to fund a buyout.
Like most entrepreneurs, you have probably spent a major portion of your life building your business. With proper succession planning, your business can provide a financial springboard for your loved ones even after you are gone.