Small business succession planning: 4 key options to consider

By Mark Valentino, Head of Business Banking | Citizens

In the daily rush of running your business, you may not have time to think about a plan for when you're no longer at the helm. Even if you do have the time, it may be difficult to consider stepping away from the company you've worked so hard to create.

If you haven't made a succession plan, you aren't alone: According to a recent Gallup survey¹, nearly one-third of all business owners say they have no plan for when they step away.

Multiple options exist for handing off your business when the time is right. All of them require some advanced preparation to ensure that your company continues to operate successfully, and the transition minimizes the tax burden on you and your successor.

Succession planning: what to do first

Early planning is crucial for business continuity. Having an exit plan helps business owners prepare for unforeseen circumstances and ensures a smooth transition for the future.

Your retirement may be years away, but it's never too early to start creating a plan for what's next. You may have to step away from your company for any number of reasons before you officially retire — and you want to be sure it's in good hands.

Generally, the succession planning process can take anywhere from one to five years. You may not need long to put your plan together, but it's better to have something on the books in case you need to step away unexpectedly. The more prepared you are, the more likely you are to get the best offer for your business.

Connect with advisors

When you start the planning process, there are a few key people you'll want to reach out to. A certified business appraiser can assess your company and give you an accurate idea of its value. Your attorney, accountant, financial advisor and HR team (if you have one) also play key roles in ensuring the success of your succession plan.

Get a business valuation

One of the most important steps to prepare for succession planning is to get a business valuation of your company. A valuation will provide a clear understanding of your company’s health and market value and help you better understand which succession options are available to you.

Options for your small business succession plan

Depending on your business structure and your goals for the company, one of the following options for a succession plan may make the most sense for you.

Leaving it to family

Over the next five years, 42% of small businesses (revenue between $100,000 - $25 million) plan to transition the ownership of their company. Among those planning a change, 28% are planning to sell or transfer ownership to a family member.²

You may be considering transferring ownership of your company to a child, spouse or other relative. While this can work, it requires planning and strategizing to be successful.

A family hand-off requires a clear-eyed assessment of the capabilities and experience of the people you plan to transition to, a detailed outline of roles and responsibilities as well as a roadmap for how you'll prepare those who will assume the reins.

Shoring up your business to ensure you're handing over a company that's on solid footing can help the new family team succeed. The earlier you start this process, the more time you'll have to make sure the plan, skills and infrastructure are in place to protect the business you've worked so hard to create.

Selling to a third party

Many business owners consider selling when they're ready to step away. A key success factor for this approach is to start early with assessing your company's viability for sale and identifying areas for improvement to make it attractive to buyers.

For example, buyers are looking for companies in growth industries with a history of consistent profits and a loyal universe of customers who keep coming back. Other attractive qualities include good supplier relationships and valuable assets.

If your business doesn't hit all these marks, you can make changes to increase its appeal. Strengthening vendor relationships with your best contacts or shoring up your customer service to ensure a more loyal base are two examples. In most cases, a sizable amount of preparation, both in the company and its financials, is required to prepare for a sale.

Selling or transferring to employees

When it's time to sell or step back, some business owners choose to gradually transition the company to staff through an employee stock ownership plan (ESOP). In an ESOP, a business sets up a trust to buy and own company stock. This stock is then made available to employees, either for purchase or through bonuses, profit sharing or other means. Employees who purchase stock don't acquire management rights or responsibilities.

Part of the appeal of an ESOP is that it lets an owner contribute to the future success of a company by encouraging employee retention. It also provides a gradual means for transferring ownership. There are setup fees and maintenance costs associated with an ESOP, so check with your financial advisor to determine if this option makes sense for you. The National Center for Employee Ownership estimates that an ESOP is most advantageous for companies with 15 employees or more.³

In 2018, the U.S. government passed the Main Street Employee Ownership Act to encourage ESOP plans.⁴ The law encourages lending to set up ESOPs and directs the Small Business Administration (SBA) to provide training and consulting to companies that want to create a plan.

Closing and selling your assets

Sometimes the right decision may be to close a business. This can be the case for many reasons, including owner involvement being essential to a company's viability, or a business model being rendered nonviable due to an industry shift. The tasks involved in this approach will vary based on your business structure, what assets you own and whether you have employees.

For example, if you run an LLC or corporation, you will need to legally dissolve the corporation to avoid continued taxation. If you have employees, you may have legal and tax obligations related to staff. Your tax advisor and attorney may be able to provide guidance.

Revisit your succession plans often

Succession plans are not a one-time event. You should revisit them often to ensure they reflect your personal goals and those of your successors.

It’s important to consider the cultural fit of planned successors during this process too. People change, and trusted employees or family members could drift away from your company's mission and strategy or no longer have the same passion for the business.

Someone who was once the perfect fit as a successor, may no longer be the right choice. Conversely, someone who may not have been ready when you first created your succession plan could become the best candidate in the future.

Take the first steps to plan for business succession

Whether your retirement is in five years or 25 years, start thinking about your future today. Many factors will impact your succession plan, including your financial situation and tax considerations. Explore the options early so that you can settle on the right path, make a plan and find the best next steps.

With access to a team of specialized professionals, including Citizens Business Banking Relationship Managers, a Citizens Wealth Advisor* can help you develop, execute and adjust a succession plan that works for you, your family, and your employees.

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