The blood, sweat and tears you poured into your business have helped build its prosperity. As you are ready to enter retirement and pass ownership to your children, it is important to be sure the transition is successful.
Only 23 percent of family businesses say they have a robust, documented succession plan, which could be why over 70 percent of these businesses fail or are sold before the second generation takes over. As you begin estate planning, developing a detailed succession plan should be on the list of priorities.
Here are five steps on how to get started with succession planning:
1. Start planning now
Most experts agree that 10 to 15 years prior to retirement is when you should start the succession planning process. This gives families time to train the next generation on operating the business and all of the behind-the-scenes work they probably don’t realize is needed to keep the business afloat.
When you write your succession plan, create a time frame for when you want the succession to be completed and get started on executing it as soon as possible.
2. Train the next generation
Even if your children have worked the register or in some other position at the business for years, there is still a lot they may not know about how the whole operation works. Build enough time into your succession plan to train the next generation on key positions and duties. That way, they will not feel too dependent on you to succeed. This will also help them train new employees they may hire someday.
3. Identify everyone’s goals
As you begin the succession planning process, talk to your children about what their goals are and what their vision is for the business. Many of the issues that come from ownership transition are due to a lack of communication from both parties. Have those conversations now to make sure everyone’s expectations are realistic.
4. Determine how the business will be passed
Would you like your children to purchase the business from you outright, or would you prefer to gift it to them? Maybe a combination of both? Decide how the transition will happen as you build the succession plan and consider financing options as needed.
5. Address tax issues
The new tax bill, which was signed into law on December 22, raised the threshold for estate taxes to $22 million for a couple. That means as long as the assets you pass on to your children are worth less than $22 million, they will not be subject to estate taxes.
However, if the total value of your assets – both in the business and your personal assets – are $22 million or more, they are subject to estate taxes. Be sure to factor taxes into any succession plan – this is especially important if the business is passed on to your children due to your sudden passing.
Succession planning can be complicated, but it is a necessary step for business owners who want the next generation to thrive. An estate planning attorney who also works in business law can help you develop an effective plan that allows you to retire and your children to build upon your success.