Passing the Torch: How Succession Planning Can Benefit Your Business
Have you ever thought about what happens to your business when you’re no longer able to run it? This is where Nevada business succession planning comes into play. It’s a strategy to ensure the smooth transition of your business to the next generation of new owners.
Without it, your hard work could be at risk, and your legacy might not continue as you hoped. By planning, you can protect your business, employees, and family’s future. It’s all about preparing for the unexpected and ensuring your business thrives, even when you’re not at the helm.
Quick Summary
Below is an overview of the key points of this article.
- Business succession planning is about choosing family members or others to take over and own a business, deciding roles and responsibilities carefully.
- The types of business succession planning include passing to a family member, selling to a co-owner, leadership succession with an employee, selling to an outside party, and using buy or sell agreements.
- In creating a succession plan you must set a timeline, choose a successor, document procedures, determine business value, plan the transition, and seek legal advice for complex structures.
What is a Business Succession Plan?
A succession plan involves choosing family members to run and own the business. It’s important to decide if other family members need to help the successors. We should also figure out the exact jobs of all family members, whether they work in the business or not. It’s crucial to think about all these roles and responsibilities carefully.
What Are the Different Types of Business Succession Planning?
Business owners often have to make tough choices, as it’s tough to grow a company without making some compromises. One tough decision is choosing who will take over the business in the future. There are a few types of succession planning to consider as you plan.
Passing Your Business to an Heir
A common choice in business succession planning is to pick a family member, often a child, to take over the company someday. It’s important to have legal agreements and communicate clearly for this plan to work well. Include these steps in your Estate Planning to reduce the chance of future disagreements.
Selling Your Business to a Co-Owner
When a business has more than one owner, a possible plan is for one owner to sell their share to another owner. This might happen if one owner dies, retires, or needs to leave the business for some other reason. First, the owners need to figure out the fair value of each share.
If the company’s stocks are publicly traded, they can use the share price. For privately-owned businesses, they’ll need a business appraisal to determine the price. Once they know the value, the two owners can negotiate the final price of the sale.
Leadership Succession Planning With Existing Employee
Leadership succession planning means choosing a qualified person from within the company to take over as a leader. This is a good way to hand over control to a trusted employee and make sure the business continues to run well in the future. Usually, leadership succession planning begins with training for potential leaders within the company.
The owner decides what kind of training is needed and how many employees will be trained. The main goal is to have someone ready to take over if the owner suddenly can’t run the business.
Selling Your Business to an Outside Party
Another choice for succession planning is to sell the company to an outside buyer. This could mean selling to an investor, a competitor, a management firm, or other interested party. Selling to an outside buyer is a good way to exit the business if that’s your goal.
The first step in selling to an outside buyer is to determine the value of the business. This can be done in various ways, depending on how the ownership is structured. Once the value is determined, the owner can proceed with selling the company.
Buy or Sell Agreements
There are two main types of agreements used in business succession planning to buy or sell ownership shares. One type is called a cross-purchase plan, where co-owners buy each other’s shares. They do this by taking out life insurance policies on each other.
If one owner dies, the other owner can use the insurance money to buy the deceased owner’s share of the business. The other type is an entity purchase plan. In this plan, the business itself buys life insurance on the owners and names itself as the beneficiary.
If an owner dies, the business uses the insurance money to buy the deceased owner’s share. The cost of the insurance policy is often tax-deductible.
How to Create a Business Succession Plan?
Every business succession plan is unique, but there are some important steps that every plan should include. These steps might need help from professionals, especially for businesses with complex structures. In any case, a good succession plan should include:
- Set a timeline for when and how the succession will happen, whether triggered by an event or a planned retirement date.
- Choose a successor and list other potential candidates with their business backgrounds.
- Document standard procedures, create an organizational chart, and develop an employee handbook or operations manual to explain how the company works.
- Determine the value of the business and regularly update this information.
- Plan how the successor will take over or buy the business, including options for funding.
Other ways to transfer ownership include putting ownership interests into trusts for family members or dividing assets among employees. Creating a business succession plan can be legally complicated, so many business owners get help from a professional business succession planning attorney in Nevada to create the right strategy for their situation.
This is especially important when the business is the main asset funding retirement, and the succession and estate plans need to work together.