United States, 1st Aug 2024, King NewsWire - Small businesses form the backbone of the economy. If you manage a family-run business, you know the importance of preparing and communicating openly with those who will eventually take over.
Family businesses contribute 64 percent of the US gross domestic product, yet 43 percent lack a formal succession plan. Given the daily pressures business owners face, it's understandable that succession planning often gets delayed. However, overlooking succession planning can jeopardize both business owners and their family members.
The Importance of Business Succession Planning
There are several compelling reasons for business owners to establish a succession plan sooner rather than later. Here are two key reasons:
Tax Considerations: Upon the owner's death, estate taxes may become payable. A proactive approach can help manage these taxes more effectively. Failing to prepare can result in losing control over the company's final disposition.
Business Value: Without a succession plan, the business's value may decline if the owner dies or becomes unexpectedly disabled.
Steps in the Business Succession Process
The business succession process involves three fundamental steps:
- Identify your goals
- Determine steps to achieve your objectives
- Implement the strategy
Identify Your Goals
Understanding your objectives makes it easier to develop a plan to achieve them. For example, do you want ongoing income from the business for yourself and your spouse? How involved do you wish to remain in the business? Are you aiming to create a legacy for your family or a charity? What values do you want to uphold, perhaps in relation to your employees or community?
Determine Steps to Achieve Your Objectives
There are several strategies to help you meet your identified goals. These might include utilizing buy/sell agreements, gifting shares, setting up various trusts, or establishing an employee stock ownership plan if you want employees to have a future ownership stake.
Implement the Strategy
The execution phase turns ideas into action. Once implemented, it’s important to regularly revisit the strategy to ensure it remains relevant amid changing circumstances, such as divorce, shifts in business profitability, or the death of a stakeholder.
A crucial prerequisite to business succession is accurately valuing your business.
Business succession is a complex process involving a myriad of tax rules and regulations. Before proceeding with succession, consider working with legal and tax professionals who are knowledgeable about the process.
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