Succession planning is crucial for business owners, especially those with a family-owned business. Before you sit down with your tax and legal advisors to draw up a succession plan, you should think through three important issues:
Who: The question of who will succeed you in the business can be the toughest of all. Most owners want to pass the business on to the family. But are your children willing to take on the business, and if so, are they capable of running it? Resolving these types of issues may take a lot of open discussion. If there is not an obvious family successor, other alternatives include selling the business to an outsider, promoting an existing employee to head the business while you retain ownership, or even selling the business to the employees.
When: When you make the transition depends on a number of factors, such as your age, health, retirement goals and the readiness of a successor. Consider whether you want to maintain some involvement with the business or make a clean break. Remember, though, you should always have a contingency succession plan in case of sudden death or disability.
How: How you structure the transition depends partly on the answers to the earlier questions and partly on financial considerations. Think through issues such as whether you need retirement income from the business or whether you primarily want to minimize estate taxes.
Knowing your goals for the transition will make it much easier to tailor a succession plan that fits your specific situation.