Succession Planning for a Small Business Onwer

by Beth Rifkin

2 min read

Creating a succession plan should be a top priority in your plans for the future, especially if your business is family-owned. A succession plan is a written strategy that determines what will happen to your business when you retire. Creating a succession plan can help protect the legacy of the business, provide continuity of service to the community, and provide financial security for both your family and the stakeholders in your company. You can develop and change your succession plan at any point, but you should begin creating your succession plan for your small business at least five years before you intend to retire or exit.

Picking a Successor

Creating the succession plan will take time, and there are several areas to consider. The first step is to decide how you’d like the business to be run after you retire. If your small business is a sole proprietorship, the you will need to agree upon new owner beforehand. You also need to determine the transition period between you and the new owner. Once you have established this, the agreement should be drafted by a legal representative to ensure that both parties agree. Even if the new owner is a family member, it is important to get this drafted to avoid any future transition difficulties. If the company has shareholders or partners, an agreement or buyout clause must be created between the remaining shareholders. At this point, the company would need to have a valuation and each share price determined to help facilitate the agreement. The final option is to sell the business to a third party, with no succession plan in place. However, this may be the option with the least amount of flexibility, and the current market environment may dictate the business’s value.

Retirement Income Needs

Once you retire, you need to determine how you’ll address your income needs during retirement. If you plan to sell the business outright, then the amount must be enough to satisfy your retirement income needs over your lifetime. Taxes are also a crucial part of this sale; getting one lump-sum value may create too high of a tax liability. Breaking down the payments over a few years will help reduce your overall tax liability. If you decide that a buyout is the best option, then establish the payments with the eventual successor beforehand. Another common option would be to receive annual income from the business in the form of a silent partnership or dividend. This would establish a stable and possibly growing income stream, depending on the success of the business. However, once you retire, you would have none of the managing rights that a new owner would have. There is also a risk that your income stream could diminish if the business fails in the future. Regardless of the successor, you should meet with a tax consultant who specializes in business succession planning to ensure that the transition is done in the most effective and tax-efficient way possible for all parties.

References & Resources

Related Articles

Retirement for Entrepreneurs: Develop a Succession Plan for Your Small Business

Canadian small businesses are distressingly likely to fail in the second generation,…

Read more

Estate Planning for Small Business Owners

Countless businesses are forced to liquidate each year due to the failure…

Read more

Passing the Torch: How to Navigate Management Transitions Successfully

Every business owner eventually transitions out of a management role. Whether you…

Read more