Components of a Successful Plan
Small business succession planing differs in complexity and specificity, but every arrangement should include the following elements:
* Selecting Key Personnel: This is the most important and difficult issue to resolve. Many owners automatically choose a family member to serve as their successor or simply ignore making the decision to avoid family conflict. Basing the choice on criteria other than business knowledge and competence is the primary reason second generation businesses often fail. It is important to recognize the skills and abilities of each person that will participate in the business, and divvy up responsibilities and ownership accordingly.
* Create a Timetable: From the moment a successor has been selected, a time frame for the process should be established. This includes a gradual shifting of responsibilities from the current owner to the future management team. A timetable helps promote the creation of a training program and provides specific markers to track the progress of the transition.
* Prepare for Retirement: The emotional impact of an entrepreneur leaving a business can not be underestimated. A lifetime of work that resulted in a successful company is difficult to walk away from. It is important for the owner to carefully plan for life after the business and pursue these opportunities with the same passion and commitment that was shown during their business career.
* Establish the Company’s Value: Whether the business will be sold or inherited, it is important to establish a reasonable value as a basis for the transaction. This is usually arrived at through an independent analysis of company’s fair market value. The resulting assessment can be incorporated into the succession plan along with the development of a funding source.
* Understanding Tax Implications: Business sale and inheritance tax laws are complex and frequently change. Current law provides a one million dollar exemption for passing assets at death through the gift tax exemption. The legal status of the business and the ownership arrangement will usually dictate the structure of the acquisition based on the most favorable tax consequences for the parties involved.