fbpx

Owning a business—of any size—isn’t just a vocation, it’s a lifestyle. Owners pour their talent, time, and significant financial investment into the success of their company or farm, and major life decisions often hinge on its success.

So selling or moving on from a business can either be an exciting or draining experience. Often these entities represent years or even decades of hard work and dedication, and there can be a lot of emotions and expectations—even someone’s sense of identity—wrapped up in it. So handing it off well, knowing when to close a business and move on, and even having a disaster plan in place is essential to an owner’s long-term financial health and peace of mind.

Often business/farm owners aren’t thinking about the sale or succession of their business until they have reached the end of their career and are ready to move on. They are so focused on running their business that the transition is not top-of-mind or an urgent priority. But sometimes the unexpected happens, so it’s important to begin thinking through these ideas sooner rather than later!

If you are a business owner or work closely with one, here are some things you may want to consider as you plan for your future and the future of your business:

What is Succession Planning?

Succession planning is the process of identifying new leaders for your business. They may be heirs, employees or even a third party. Essentially you are preparing your business for when you won’t be there anymore. 

Why Do I Need a Succession Plan?

A succession plan helps you articulate and weigh the opportunities/paths available to you, and sets the groundwork for a stable and financially efficient hand-off of your farm or business. You’ll get a person/group in mind to take over someday, and you can strategically train/grow their leadership so they’re ready for the role whether something happens to you unexpectedly (like a change in health or finances, or even an untimely death) or on a planned timeline (like a retirement date you agree on together).

While every business owner plans to oversee their eventual transition out of leadership, sometimes planning for the worst case scenario can ensure the business is able to carry on—and that your heirs will still be provided for.

What is Involved in Succession Planning?

Here’s the worst-case scenario first: If you have no estate or succession plan, the state will decide what happens to your business and its assets if you die.

A basic plan will align the future of your company with your vision and values, and will help you ensure your business assets are transferred in the most tax-efficient way. Here is how to get started.

 

Step 1: Identify Your Goals 

Begin by identifying your long-term business goals. A starting point may be thinking about what or who you’d like to provide for. Retirement? Heirs? Future health of the company? All of the above? Your goals will dictate your strategy.

Step 2: Identify Potential Leadership Candidates

There are an abundance of options that will depend on how your business is structured and who you feel is best suited. Is it a family business, and would you like a child/children to take over? Do you have employees who you want to invite into ownership? Perhaps you want to sell, and simply need to put a value on the business/clientele/assets? You will need to determine who to keep in the communication loop as these decisions are made.

The more heirs or interested parties, the more complex the plan may become. If you are considering ownership transfer, you’ll need to address the potential ability (or lack of ability) for each candidate to feasibly manage the business. Not every competent employee is suited or ready to run the organization (even if they are your own family!) so you may need to put some intentional training/guardrails in place as they take on leadership.

You also need to develop contingencies for unforeseen events. For example, if the plan is for the business to go to one child, but they become incapacitated or refuse the role, who is next in line? Is there a disaster clause in case something horrible happens to your entire family, and there’s nobody left to run the business? These scenarios are unlikely, but it’s important to think through potential outcomes.

Put together a rough timeline of when you’d like to scale back or end your involvement in the company, and then count backwards from there. When will you ask other leaders to take on more leadership, and will that all happen at once? When will ownership or assets change hands? WIll you remain involved in some way, even in a consulting capacity? Make it “yours” and make sure it makes sense for your financial goals and the people in your circle.

Step 3: Look at Your Assets

You’ll want to consider how the business makes money, which will play into the current valuation of the business itself. Are there any active clients, contracts, dividends, or patents to consider? You’ll also need to pull together a list, and approximate fair market value, of tangible assets that are owned by the business and can be included in the succession plan. Include inventory, property/building(s), and any potential future income streams, and make a note of tax depreciation, if applicable. If your business is a farm, consider the land itself, machinery, grain, and livestock, buildings, and even the homestead.

Step 4: Be Proactive

It’s common to think, “Yeah, succession planning is a good idea. I should do that someday,” but then put it on the back burner forever. Consider taking a day or weekend retreat annually to think about your long-term vision for the business and what succession will look like. If you are able to continually address this as the makeup of your organization ebbs and flows, you will always be in the best position to make educated decisions about moving forward.

Step 5: Begin Conversations with Family/Heirs.

A succession plan should never come as a surprise, and conversations with employees should look and feel different than conversations with heirs. Make a list of all the people who should be kept up-to-date on your succession plan, and consider when and how to speak with each one. For example, an all-team meeting probably isn’t the best time to announce a successor, unless you’ve really talked that through with key parties first! A conversation with your children might be more casual and handled one-on-one or in a group. It may even include a Legacy Letter.

Be prepared to explain how you arrived at your key decisions, and make sure each person is on-board with where you’re headed if you’re asking them to take on more responsibility. You may be surprised by the assumptions that employees, partners, and children have about the future of your business! It’s best to document and then check in often to reiterate your vision, and each person’s role within it. Work with your professional advisors (attorney, wealth manager, CPA) to make sure you’re looking at your plan from all angles and that nothing is missed.

 

Charitable Succession Planning

 Just like with estate/legacy planning as a whole, some of the greatest opportunities to give are with traditionally non-liquid assets, like an interest in your business itself, or assets/property owned by the business. Because most business owners have a good percentage of their net worth tied up in the business, they often aren’t able to make the significant gifts to charity that they would have wanted. Whether you’re planning to operate your business for years to come, or you’re winding things down with an eye on retirement/succession, you may be able to strategically gift business-related assets or ownership in a way that could have significant tax benefits for you and your family. Here are a few strategies to consider:

Partial Gift, Partial Sale

Instead of directly selling the entirety of the business interest to the seller, with this strategy you can sell a majority (or whatever percentage you want) of your business and gift the other undivided interest to a charitable entity, of which there are several options.

  1. Charity
  2. Donor Advised Fund (Foundation)
  3. Charitable Remainder Trust
  4. Charitable Gift Annuity/Deferred Charitable Gift Annuity

 

These gifts are actually owned by the charity/trust/foundation and then sold to the buyer (be careful to avoid prearranged sale, but they can be “waiting in the wings.” Funds paid to acquire the business then goes to charity, donor advised fund or to fund the charitable vehicle.

This strategy allows you to save on taxes as a result of the charitable giving, transfer your business effectively and create a charitable opportunity where there previously was not one, which satisfies all the goals for generous business owners!

Other strategies include a full gift, where the owner wants to make the most impact with their business by donating all of it (follows the same process as above but with all of the interest being gifted) or an asset-based giving, where you give certain assets within the business as opposed to the business itself (could be land, buildings, vehicles, etc.)

At Apex Legacy Consultants, we work with business and farm owners on a regular basis and we understand that each legacy and succession plan is unique and requires a tailored approach. If you don’t have a plan in place, or would like to explore some new opportunities, we’d love to work with you and help you get started with our Legacy Gift Planning Program.

Get Started Today!

 

Ryan Johnson

Ryan Johnson

Former Legacy Consultant

Ryan joined our team from the marketing and advertising world, where he learned that effective communication leads to action. Though he left the Apex team in our business transition this past summer, he left this blog post behind, and we’re posting it with his permission. Ryan’s interest in personal finance–paired with a passion for stewardship–made gift planning an ideal career path for him, and he’s building on that work today. We wish him all the best in his next endeavor! 

Share the Story, Choose Your Platform:
Share This