The United States has the world’s most competitive economy, and only around half of all small businesses reach the five-year milestone. A sign that you’ve achieved business success is when you have to consider a potential successor for when you have to step away from your company for good. However, like life insurance, business owners stepping away from their companies isn’t a conversation that elicits passion.
You must consider the next steps for your company upon your passing or leaving for the continued success of your business and the financial future of your spouse or other beneficiaries. As you read on, we’ll give you three essential tips for transferring ownership of your family business.
1. Draft a succession plan.
When a business owner steps away from their small business, it can create uncertainty for all stakeholders. It could become a struggle between their business partner and heirs or a family power struggle between potential successors. The point is, it’s all bad for your small business. The first step to ensuring the continued success of your business long after you’re gone is careful business succession planning.
If you have a business partner, you could agree to sell your portion of the business (cross-purchase agreement) to them at a certain time or when you pass. However, the challenge with such agreements is that your partners might not have the cash to purchase the rest of the business assets from their business partner’s estate when the time comes. However, through an entity purchase agreement, the company has a life insurance policy on each of its owners, enabling the surviving owner to buy the deceased’s portion of the business.
Whether you intend to sell your business (or portion) or transfer ownership to your heirs, the key is to have a plan to enable a seamless transition when it’s time. Early planning will give you, your business partners, and heirs peace of mind about the future of your company.
2. Streamline business operations.
Eventually, someone else will be running your business, and part of making a seamless transition is simplifying business processes. In fact, if you’re planning to sell your business to an outsider, streamlining key business operations will increase the value of your business.
Implementing automation into repetitive, essential business processes will enable new ownership to take over operations without disruption to key processes. It can also make a significant impact on your company’s bottom line in the present. Indeed, implementing artificial intelligence is an easy business decision that will increase your business’s value and efficiency.
3. Consider putting your business in an irrevocable trust.
A couple of the key issues heirs face when taking over the business from a family member are paying estate taxes and taking on the deceased’s debts. Placing your business in an irrevocable trust will clear it of taxes for successor owners and allow them to get a fresh start. However, you’ll no longer own the business once you divest it to an irrevocable trust.
Creating a comprehensive business succession plan is essential to ensuring your family business remains such. Business owners with no heirs also need a plan for business succession, especially if they have business partners. Streamlining your business operations will make it easier for the next owner of your small business to continue things as usual. And, putting your business in an irrevocable trust is an estate planning tip that could save the next generation of your family business a lot of money in estate taxes and other fees.
A business succession plan is analogous to life insurance for small businesses. It’s unpleasant to think about, but it’s necessary for your future generations. So, protect the value of your business for the next generation with effective planning.