Business succession planning — the process of thoughtfully planning ownership transition of a business — is still uncommon among businesses with fewer than 300 employees. In fact, fewer than half of small businesses report having a formal plan in place to transition ownership to a family member, a group of employees, or another company.
Hurdles to Succession Planning
Many business owners are so busy running their businesses that they simply ignore the fact they someday will no longer be in a position to run their companies.
“There are a lot of different hurdles to start business succession planning that business owners face,” says Brendan Freeman, President – Private Wealth at First Business Bank. “If I had to boil it down, the first is fear of giving up control and the second is procrastination.”
The fear of giving up control is often rooted in a deep sense of identity with the company. “No one is going to operate the company quite like the business owner,” Freeman says. “They’ve invested so much of their blood, sweat, and tears into the business. That sweat equity has given them comfort over a long period of time, so giving that up is really a difficult proposition for business owners.”
Still others mistakenly believe that business succession planning is unnecessary — thinking their companies will naturally and easily transfer to the next generation if something happens to them. Formal business succession plans address tax, management, and estate planning implications of any process you’d choose to transfer business ownership, which helps to ensure the longevity of the business and the harmony of the family dynamics.
“There are so many tools within the tax code that can be utilized to get the business, over time, out of the business owner’s estate and, ultimately, get it into the hands of their heirs, while minimizing the estate tax consequences,” says Christine Waldschmidt, JD, Vice President – Trust Advisor within First Business Bank’s Private Wealth group. “It’s always good to start early, particularly when it’s tied to family succession planning and estate planning together.”
Reasons to Begin Planning
It’s never too soon to start business succession planning, and, indeed, sometimes it can be too late. While many business owners may picture a gradual retirement — and exit — from their companies, sometimes life doesn’t go as planned. A sudden event, without a plan in place, can be catastrophic for the business as well as loved ones.
Putting time into thoughtful business succession planning pays off in peace of mind, increased business value, retention of key employees and management, and improves the probability the company will survive (and thrive) past its current ownership.
How to Start Business Succession Planning
The best place to begin is at the end, Waldschmidt says. “If you’re not sure where to begin, think about your ultimate goal. Do you envision building up your company so you can realize the greatest value in a sale to a third party, and then you sail off into the sunset? Or are you planning to transfer control and ownership to key employees? Are you envisioning passing this on to your children?”
Consider your options, including an outright sale, a partial sale, an employee stock ownership plan (ESOP), a family transfer, or transferring the business to an employee or key party. Whichever option you choose, it’s critical to make sure your personal estate planning strategy also works with the business succession plan.
It takes a team of experts to get this process right — a trusted accountant, lawyer, banker, and possibly a business valuation expert are all important to help make sure the business succession plan is sound and prioritizes your individual estate planning goals.
Listen to The First Business Bank Podcast for more about business succession planning and the best approach to get started. First Business Bank’s business succession planning experts share their best tips and strategies for starting the business succession planning process, including:
- Where to start and what to consider as you begin the process
- General benefits and disadvantages of popular business succession options
- Ranking your priorities to help make decisions
- Options to stay involved in the business after transitioning ownership
Estate planning and business succession planning should go hand-in-hand for most business owners, protecting your loved ones should something unexpected happen. If you’d like to start talking about business succession planning, reach out to us to start the process.Contact Us