Money: Succession planning for small business owners

Claire Damgaard PHOTO CREDIT: TH file

Most business owners want to grow their businesses and maybe pass them on to the next generation. But how many owners succeed?

Relatively few, as it turns out.

Studies show that only one-third of family firms make it to the second generation, and just a sliver get passed on to the third generation.

A key reason for this is that many companies lack proper succession plans.

Consider the situation your family, employees and company would be in if something unexpected were to happen to you. What would happen to your business? Would it stay in the family? Could it realistically stay solvent without you at the helm? Or would it be sold?

Then, there’s the million-dollar question: Do you know what your business is worth?

The answers to these questions might not be as straightforward as you imagined. That’s why you should start planning now, even if you plan to stay with the business for years to come.

What options are available?

If and when you exit your business, there are four possible successors: Family members, co-owners, key employees or an outside third party.

That brings us to a succession action plan and exactly what that entails.

First, select your successor(s). This might require careful analysis.

Next, determine your business valuation. Bear in mind that when a business is sold to family members, the transaction draws extra scrutiny from the IRS.

Finally, develop a plan to transfer your business interest quickly to minimize operational disruptions.

Once you identify your successor(s), you must make sure that the individual(s) is in a position to take over the company. And you must ensure a smooth transition by outlining the terms of succession in advance.

A buy-sell agreement will work differently, depending on the type of business entity and the number of owners. Each type of agreement helps create a smooth process for transferring ownership of the business. The buyer can purchase a life insurance policy to help make sure there are available funds to purchase the business when the time comes.

Additionally, a buy-sell agreement helps show creditors and customers that your business is sustainable because you are taking action to mitigate risk.

Each business is unique, of course. But succession planning is something that all businesses should consider.

Claire Damgaard is an agent with New York Life Insurance Company in Dubuque.

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