Despite millions of small businesses operating in the United States, many small-business owners don’t understand the process of formulating a proper business succession plan. One of the major concerns faced by many business owners is how to coordinate a proper transfer of their business to the next generation, or to their estate, especially as their businesses grow and become more successful and as they approach retirement.
Ensuring that proper measurements are taken for a smooth transition is vital for every business. Yet, it is commonly overlooked, and even more frequently, it is misapplied. There are four (4) common mistakes business owners make when attempting to create a succession plan.
1. Failing to Plan is Planning to Fail: One of the primary reasons why many fail to have a plan is because they don’t make planning a priority. Most business owners do not consider it important enough to take the time to complete a succession plan. However, the effects of non-planning will prove to be burdensome when it comes time for retirement, or upon the death of an owner. Take the time to sit down with a professional and discuss your options – it is likely to save you money and effort down the road.
2. Failing to Coordinate your Business and Estate Plan: A common misconception business owners have is that, upon their demise, the assets owned by the company would automatically be distributed to their surviving spouse. Although that may have been the wishes of the deceased, that is not always how it works in reality. Having a carefully drafted business succession plan would include such concerns and ensure the wishes of the owner are fulfilled.
3. Failing to Appraise the Business: Similar to knowing the value of your home, it is equally important to know the value of your business. This is especially true if your succession plan involves the sale of your business, or if it is passing to your heirs, as the value would need to be noted for estate tax purposes.
4. Failing to Create an Estate Plan: No business succession plan can be complete without having a proper estate plan. If it is your intent to have the funds and assets of your company transferred to your heirs, the most efficient manner for it to occur is through your estate (i.e. Revocable Living Trust). Furthermore, it is also important to have a contingency plan in place in the event that you become disabled or otherwise unable to manage your business and/or financial affairs. Who would run the businesses, or make the decisions? Establishing a Power of Attorney to handle these affairs is necessary for your company to continue its operations.
Business owners have a busy, compact, and hectic schedule. However, by not taking the proper steps to set up an effective succession plan, you hurt not only yourself, but also your business, and your heirs. Proper planning can take a few hours of your time, but it can save years of headaches afterwards. Always be sure to consult with a trusted professional who can assist and guide you through the process and help you to meet your business goals.
Adil Daudi and Nicholas Garlinghouse are Attorneys at Daudi & Kroll, P.C., focusing primarily on Asset Protection, Physician Contracts, Estate Planning, Business Litigation, and Corporate Formations. They can be contacted for any questions related to this article or other areas of law at firstname.lastname@example.org, email@example.com, or (517) 381-2663.