When you build a business, you're not simply fulfilling a vision while earning a living; you're also creating a legacy. It's your legacy -- and it's something to pass along.
Enter succession planning: the process of preparing to hand over your company to future leaders whom you trust will care for it. Let's look at how you should start preparing for your company's future management.
The best succession: five ways to prepare
Succession planning is about protecting the corporate assets you've built up, but it's also about making sure your trusted replacements continue to grow the business after you've stepped away from the owner's desk. The following five points are key to putting a strategy into effect.
1. Be certain the right business structure is in place. Whether you're an LLC or a C-corp -- even if you're a sole proprietor -- the reporting requirements and tax obligations that surround the management of your business will come into play during ownership transition. Plan far enough ahead that your corporate structure is in line with exactly what kind of business experience you want the next generation to inherit. Yes, you can alter the structure, but you want to dig into those details well before succession is your primary focus.
2. Consider the role of partners. Unless there's a contractual stipulation against it, you generally have the right to sell your shares, or pass your reins, to people of your choosing. But building a future for your hand-picked successor means treating your current partners with care, too. Nonselling participants in the transition will almost certainly want to help steer the process, so you may need to draft some language that dictates how that works. Remember, there's a vast difference between handing over a company full of healthy relationships and passing along a hornet's nest of resentment.
3. Leverage your tax options. Look into opportunities such as granter-retained annuity trusts (in the case of family transitions).The GRAT often allows one to remove ownership from the seller (you) and then set certain thresholds for the moving of revenue from the sale. Sometimes these are helpful ways to alter tax burdens in the short term. In almost every case, rules about basis, market value, and moving estates will also be factors. Bottom line: Consult with tax-law experts early in your planning process.
4. Buffer your business against early missteps. You may want to build a transition that's more nuanced than simply "X transfers to Y." One example of "nuance" is that of installment sales tied to performance. These can include a default clause allowing you to reclaim the business if the next generation gets into financial hot water and can't complete the terms of the purchase over time.
5. Draft a vision statement. A statement of vision is sometimes put into place to protect the business from radical changes, allowing you to have a say in alterations that might run counter to what you intend for the company.
Once you have these ideas in mind, more questions are sure to follow. If you're financing your automobile through your business, what happens to it when you step down as owner? What's the impact on your personal finances when you no longer have that business credit card?
The underlying strategy here is to take small steps and draw upon third-party expertise.
Create your initial succession plan, then seek the assistance of lawyers and accountants who have a deep understanding of all the rules and the ropes of such a transition. You're mapping the path to your next phase of life. You want to know that the business you leave behind will continue to grow and prosper.
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James O'Brien is a contributor to WiserAdvisor.