What is Business Succession Planning?

Well, if you become incapacitated, retire or die, then business succession is going to happen.

Period.

The only question is whether the business succession will occur by design ... or by default.

Trust me, the former is much easier on all concerned.

While small business owners devote much of their time to growing their businesses, they frequently forget to think about what will happen to the business without them at the helm.

Consequently, that is why it is critical to have a business succession plan.

Enter a timely article from business.com titled "The Show Must Go On: The Importance of Business Succession Planning."

As the article explains, there are some key underlying factors that determine whether a business succession plan is necessary.

Why?

In some instances, it is easiest to simply sell the business outright.

At other times, you may not be the only cook messing with the soup.

Yes, partners and key employees may want to continue the business after you (the founder) are no longer involved.

Accordingly, after assessing the long-term viability of the business without you, consider a succession plan that includes selecting a successor and getting the business appraised.

Selecting a Successor

Sometimes a small business owner will select a family member to assume the leadership role. However, does he or she have the requisite skill set or experience to make a go of it?

Even though they share your excellent DNA, you cannot assume they will have the ability or will even want to continue the family business.

Regardless, whether family members, partners or key employees, it is essential that you select and train your successors in all phases of the business.

Then - and here is the hard part - you must be able step aside and let the successors start to make the transition.

The Valuation of the Business

There are three basic ways to determine the value of a business: the Asset Approach, the Income Approach, and the Market Approach.

As the name suggests, the Asset Approach examines the business assets and liabilities to arrive at the business value. As you might imagine, this focus on the balance sheet misses the mark on intangible values like good will or market conditions.

In contrast, the Income Approach analyzes business income, to include reviewing past earnings, projecting future earnings, factoring future cash flow and capitalization. The objective? To arrive at the present or future value of the business.

The Market Approach takes a different tack. This approach entails making a comprehensive analysis of comparable companies that have been sold in the same industry. Naturally, this analysis makes allowances for differences in the size, duration, and market risk of the business.

Whatever the approach you take, an objective evaluation of the present or future value of a business requires the services of a business valuation expert such as a CPA with business valuation credentials. For example, Jeff Hanson, CPA, (my neighbor across the street) is one of the top national experts.

Still not convinced?

Creating and implementing a well-thought-out succession plan helps business owners in at least two ways.

First, if the value of the business is determined right now, then there should be no need for valuation in the event of death - and the price for a partner's share can be agreed upon with unnecessary drama.

Second, when you combine a succession plan with a comprehensive estate plan, then you greatly increase the chances that the business will survive, your family will continue to thrive (albeit without you), and the IRS will be "disinherited" to the maximum extent allowed by law.

That last bit got your attention, yes?

But this is not a DIY project.

To pull all of this off without any glitches, your team of advisors should include a CPA/valuation expert, a tax advisor, and an experienced estate planning attorney. 

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: business.com (January 21, 2016) "The Show Must Go On: The Importance of Business Succession Planning"