Different succession options can help you meet your goals for the future of your business and to help you plan for your retirement, too.
Succession planning may feel like a “later” to-do, something you tackle after you get done juggling all your regular to-dos. But for small and midsize business owners, succession planning can never start too early. Why? Because a thoughtful approach to your succession plan can help you prep for the unexpected, be it the death of a co-owner or a shift in life circumstances. Unfortunately, only 6 in 10 business owners have a plan in place.
You may have a number of goals for your succession plan, from ensuring business continuity to planning retirement income. And the structure of each succession plan option offers you a different way to transition out of leadership and ownership of a business. Here’s a primer on several choices and their benefits and considerations.
Succession option #1: Transfer the business to family, either through a gift or sale, or combination of the two.
Several types of family succession, including a gift or sale, provide a way to establish a family legacy. There are some broad impacts to a family-focused succession plan.
Benefits
- Establishes clear leadership continuity for customers.
- Creates professional opportunities for the next generation.
- Offers retirement income source for the current owner, if structured, at least in part, as a sale.
Considerations
- May require additional communication and planning to help ensure equitable treatment for any heirs not involved in the business.
- Could trigger a tax burden if the transfer is all at once.
- May have negative impact to retirement income planning if structured as a gift, or if a downturn in business impacts payments from an installment sale.
Succession option #2: Sell to a co-owner.
Some businesses may have co-owners who could assume ownership of the business.
Benefits
- Co-owner may know the business well for a more seamless transition.
- Provides retirement income and specific transition planning for the departing owner.
Considerations
- Demands clear documentation and communication to ensure a successful transition in case partner relations break down.
- Requires potential buyers to have a plan to build up funds or to buy in installments, which can create a time or financial burden for departing owners who want to exit quickly.
Succession option #3: Sell to an outside person, group, or business.
You can sell to a person or a company completely outside of your family or the current business structure. It could be a competitor or simply an interested party, whether they have experience in your industry or not.
Benefits
- Offers potential for a higher sale price and a lump sum payment.
- Enables you to create concrete retirement plans with a known payout.
- Avoids family issues, or difficulties in a transition to existing business leadership or employees.
Considerations
- Requires time to research the potential buyer.
- May be emotional, with less influence over the future of the business and the employees.
- May need to stay involved with the business longer in order to ensure an effective transition to an outsider.
Succession option #4: Sell to employees through an ESOP.
An employee stock ownership plan (ESOP) transitions ownership to employees. An ESOP is a qualified retirement plan that invests primarily in the stock of of the employer. It enables employees to earn shares and become vested over time, helping them build long-term financial security.
Benefits
- Serves as a retention and recruitment tool for current and potential employees.
- Invests employees directly in the success of the business.
Considerations
- Requires time and effort to build a management team; employees are responsible for the day-to-day business operations.
- Requires the business’ ongoing financial commitment to the ESOP versus reinvesting those funds into the business.
About buy-sell agreements for succession planning
Once an owner has identified their succession plan, they’ll put a buy-sell agreement in place. This formal contract details the triggers (including events such as a retirement, divorce, death, or disability) or timeline for a sale, transition plans, and the funding to facilitate the ownership transfer. There are different ways to structure a buy-sell agreement; members of your team, including a financial professional, attorney, and tax advisor, can help.
Liquidation: a different kind of business exit
An owner doesn’t have to create a plan for succession; they can choose simply to end the business and liquidate any assets. That means selling machinery or goods, informing customers, and winding down any activities. A financial professional can help weigh the options between succession and liquidation.
What’s next?
Working with a financial professional early can help streamline the succession planning process. Learn more about succession planning and how to get started using these resources.
