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Planning for Succession: 4 Options for Small Businesses

Key Takeaways:

  • Planning for your business succession long before you leave the helm can help ensure your company continues as you would like it to.
  • Leaving the business to family, selling it to a third party or employees, or closing down and selling the assets may all be viable options. The right choice depends on your specific situation.
  • No matter which succession strategy you consider, you’ll have many things to consider and much information needed to make a wise decision. Some of these include:
    • An evaluation to assess the market value of your business.
    • Planning sessions with your attorney, tax advisor, and other trusted professionals to make the best decision, and maximize the net return on your decision.

In the daily rush of running your business, there may not be 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 for you to consider stepping away from the small company you’ve worked so hard to create.

If you haven’t made a succession plan, you aren’t alone: Three in five small businesses don’t have a succession plan in place, according to Nationwide's latest Harris Poll small business survey.

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. One of the most important preparation steps to take is to get a business valuation of your company. A valuation helps you better understand which succession options are available to you.

Even if succession is not on your immediate to-do list, review the following options.

Leaving to family

The vast majority of business owners hope to transfer ownership of a company to a child, spouse, or other relative. While this can work, it requires planning and strategizing to be successful. The Family Firm Institute reports that only one-third of companies handed over to family stay in business.

Making a family hand-off work requires a clear-eyed assessment of the capabilities and experience of the family you plan to transition to, a detailed plan for roles and responsibilities, and a roadmap for how you’ll prepare the family member to 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 think of 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 of these marks, you can make changes to increase its appeal. Strengthening vendor relationships with your best contacts and phasing out the weak ones or shoring up your customer service to ensure a more loyal base are two examples of improvements you can make. In most cases, a sizable amount of preparation, both in the company and its financials, is required to get a company ready for 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 makes financial sense for companies with 15 employees or more.

In 2018, the U.S. government passed the Main Street Employee Ownership Act to encourage ESOP plans. 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 down 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 non-viable 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, there may be legal and tax obligations related to staff. Your tax advisor and attorney may be able to provide guidance.

Many factors will impact your succession choice, 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 step.

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