Succession planning involves exploring a business owner’s options for selling his or her business and putting a plan together to maximize its value upon sale and ensure the continued viability of the business into the future. It involves tax and estate planning, updating the company’s important legal arrangements, and conversations with family members and key employees as well as professional advisors.
Failure to plan could mean that you miss out on significant tax savings. If your company holds a lot of non-active assets like cash or investments in the two years leading up to a share sale, you could be disqualified from the lifetime capital gains tax exemption when you sell the company. There are a number of ways to plan to ensure that you continue to qualify for the exemption.
Planning is particularly important for a family business. For example you might have a couple of children involved in the business, but one might be better suited to running the business than the other. Planning might help you find suitable roles for each child while preventing sibling rivalry, or a way to compensate a child who may not be involved in the business. A plan can also help to ensure that your retirement savings are withdrawn gradually from the business without causing a cash crunch, while also being sheltered from a downturn in the company’s fortunes after your retirement.
If you are thinking about selling the business to key employees, planning can help to ensure that those employees have enough incentive to stick around long enough to buy it from you. You might offer these employees a small equity stake or a gradual buy-in over the short term for example. You might also want to explore ways to sell the company to your employees by way of vendor financing, to help facilitate a deal in cases where more conventional financing might be difficult for your employees to obtain.
If you miss these opportunities, you might eventually be forced to sell the company at a discount or to an inappropriate buyer.