A Brief Guide to Succession Planning for Business Owners
A weighty topic, succession planning for business owners involves considering both one's own mortality and the future of a company for which you've sacrificed and of which you've become proud--your legacy. The task is daunting, but a well-designed plan is necessary and should be thoughtfully and properly composed in order to best streamline its execution at your passing. Ideally, a successful ownership transition plan should be decided upon and set in place decades before a business owner's foreseeable death. The process can be complicated and is unique to each situation, but most plans will contain a living trust, life insurance, and a succession plan.
Living Trust
Required involvement with probate court after a family member, business partner, or co-worker has died is never desirable. A living trust differs from a will in that it's not subject to probate and functions as a separate legal entity that effectively owns your share of the business. This document lets you designate a successor, saves you money on taxes and fees, and keeps your affairs private by allowing your attorney to transfer assets immediately upon your death to whichever party or parties you've specified.
Life Insurance
If yours is an owner-dependent business, meaning you don't expect it to continue generating revenue once you aren't operating it anymore, a life insurance policy will simply provide your family with a safety net to be used while they set your affairs in order. However, if your business is multigenerational or if you're bequeathing it to a partner or co-worker, life insurance provides the necessary liquidity to purchase a business that is expected to continue to grow after the passing of its owner.
*Alternatively, business owners can establish an ILIT, or irrevocable life insurance trust, to provide the funds necessary for their successor to purchase the company.
A Succession Plan
Regardless of your successor, if you have one, you need a succession plan. Although every business succession is unique, the plan provides at least a basic overview, designating the person or entity to assume control of the business and the manner in which the transition should be made. These plans typically consist of two main components: management succession planning and ownership transfer considerations.
▪ Management succession planning deals with the pragmatic operation of your business; here, you'll outline specific development and support for your successor and delegate their authority. This facet of the succession plan also ensures maximum retention of key employees through equitable compensation planning for all involved parties.
▪ Ownership transfer considerations involve the technicalities of the business transfer itself. Who will coordinate between the future owner and manager of the business, and how will they do so? What will the best interest be of the owner and his or her family in multiple scenarios? If your successor isn't a family member, partner, or co-worker, can the business be transferred within your lifetime, thus allowing you to consult directly with him or her before ownership transfers?
Forming a comprehensive succession plan early on as a business owner can save you and your family from unaccountable stress in the future. The above information serves only as a brief introduction to trusts and succession planning. As every business transfer involves its own set of factors, you're well-advised to consult a licensed wills and trusts attorney.
