Whether you’re the owner of a family-run operation that makes its decisions around the dining table, or a department head at a growing enterprise that deliberates in a fancy boardroom, you need a succession plan.
A business is nothing if not a combination of talented people who make important decisions that keep the wheels in motion. When one of those people (including yourself) steps down – for personal reasons, health, retirement, to pursue other ventures, etc. – you need to have someone else queued up who can fill their shoes. Equally important, you need a transition plan to help the successor pick up operations where they left off with minimal disruption.
To that end, here’s a high-level succession planning checklist that will help you start planning for how you’ll pass the torch when the time comes.
1. Know how the structure of your business affects its future
If you’re the sole proprietor of a business or farm, you and the company are basically one in the same. It’s not a pleasant thought, but if you meet an untimely end, so does your business, according to Small Business Chron. Its assets will essentially be liquidated and used to pay off any debts. Any money that is left over will be distributed based upon the terms in your will. As such, if you know that you want your business to thrive long after you’re gone, then it may be in your best interest to register it as an LLC or a corporation. This setup gives you more options in terms of transferring your stake in the business onto a beneficiary should you pass away, become unable to work or choose to retire.
2. Appoint a willing successor before you actually need to
The ease of this task varies depending on the type of company, but tends to be more challenging for small and medium-sized businesses and family-owned companies. An owner of a corporation or a department head may have a management staff that it can choose from when considering a successor. A family-owned farm, on the other hand, may have a smaller pool of talent if it intends to keep the business in the family. Either way, it’s important to figure out what will become of your business after you or one of your partners is gone, before you have any intention of leaving.
3. Consider the financial implications of your decision
Transferring your interest in a company onto a beneficiary may leave you or the recipient exposed to certain taxes such as a gift tax or estate tax. Consequently, it is important to figure out exactly how you intend to transfer the company to someone else, and if you have adequate financial resources to cover any taxes that come with it. This is where estate planning can get a little bit complicated.
There are plenty of options available – using a life insurance policy to cover estate and/or gift taxes, reducing the taxable assets by selling to a successor below the company’s value, having the successor outright purchase the whole company – but the best option for you will ultimately depend on your circumstances, and each comes with its own liabilities. Your best course of action here is to get in touch with an attorney or tax advisor to assess your options.
4. Document your business strategies, policies and processes
Whether you’re the main owner of a business or you’re in charge of a specific department, clearly and formally document your strategies, policies and procedures – both for day-to-day functions and for emergency situations. Ideally, if you’ve proactively scouted out your potential successor(s) ahead of time, they will already be familiar with the mission and the work that needs to be done. Either way, it’s crucial that you have a documented template, at least on a high level, for how you do what you do. This will make it much easier to transition operations onto successors without rocking the boat or disrupting the customer experience.
Succession planning is not simple, and you’ll need a lot more than this high-level guide to cover all your bases. However, it’s one of the most important – and yet most oft-overlooked – aspects of being a company owner or decision-maker.
To start planning for your business legacy, feel free to get in touch with the experts at Bank Midwest today.