Whether you own a glass company in Green Bay, a car dealership in Platteville, or bait shop in Rhinelander, now is the time to tackle succession planning if you’re thinking about retiring.
What is succession planning? It’s the process of preparing for the transition of leadership and ownership when you decide to step away. If you don’t have a succession plan, your business may not stay afloat once you’ve sailed off into the sunset.
In this blog, we explore these four areas:
- Importance of succession planning
- When you should start
- Key components of your succession plan
- Legal and financial aspects
The importance of succession planning
As a small business owner, you’ve spent years, possibly decades, building your business. It’s not uncommon for a small business owner to overlook the importance of succession planning, but it’s a crucial step in making sure your business succeeds after you’ve moved on. Research shows only 70 percent of small business owners take this major step.
Simply put, succession planning involves deciding who will take over when you retire. It’s also about preparing your successor for leadership. Committing to this process sets your business up for success even after you’ve stepped aside, reducing disruption during the leadership transition and securing the legacy of what you’ve worked so hard to build.
Planning for unexpected events or emergencies is another piece of the puzzle. Life is unpredictable, and unforeseen circumstances can strike at any time. Like succession planning for retirement, preparing for the unknown includes:
- Finding potential successors
- Outlining roles and responsibilities
- Drafting a clear roadmap for a smooth continuation of operations
when to start succession planning
As the saying goes, “Don’t put off tomorrow what you can do today.”
Especially for business owners nearing retirement, it’s best to start succession planning well in advance. At minimum, you should start before you decide to sell your business. More specifically, a good rule of thumb is to start planning three to five years before you want to sell.
This will give you plenty of time to make thoughtful and calculated decisions in preparation for a sale. This also gives you more time to prepare and train potential successors.
Key components of your succession plan
There are six key components you should have in your succession plan:
- Create a timeline for handing off the business: Many owners base their timeline on when they want to retire. However, the best time to sell is when your business is thriving and running smoothly, when it’s most appealing to buyers.
- Find out the value of your business: Working with a business broker can help with this process.
- Gather financial statements: Getting your financial house in order is essential to succession planning. This is also a good time to have an accountant conduct a business audit.
- Lay out processes and operations: Even if you’re selling within the family, don’t assume they’re familiar with exactly how your business functions.
- Select a successor: This is the most important decision of succession planning, whether your candidate is a family member, business partner, or third party.
- Reveal the plan: Transparency is important for all stakeholders. Carefully consider how you’ll deliver the news, as this is likely to be an emotional announcement.
Legal and financial aspects of succession planning
Don’t be caught off guard by potential legal hurdles. Your best bet is to consult with an attorney specializing in succession planning for guidance on:
- Ownership transfer
- Shareholder agreements
- Contracts
- Compliance with relevant laws and regulations
Likewise, you’ll also want to understand potential tax implications that may affect the financial outcome of the transition. Contact a tax advisor to learn more about:
- Capital gains extensions: You may be eligible for a lifetime capital gains extension, which could reduce your tax burden on the sale of your business.
- Estate and gift tax planning: These taxes can significantly impact the transfer of ownership to family members. Smart planning will help minimize tax liabilities, leading to a more seamless transfer of ownership.
Succession planning may seem daunting, but it’s a must-do to ensure your business thrives after you’ve handed over the keys.
Whether you’re considering succession planning or not, your small business needs smart protection. Learn more about coverage for your Wisconsin business by reaching out to your local Rural Mutual agent.
