If you’re a business owner, you’ve probably put in countless hours, resources, and energy to build your business. But have you thought about what will happen to your business when you’re no longer able to run it?
Small business succession planning is not just a formality; it’s a crucial part of securing your legacy and ensuring that your business thrives in your absence.
Handing Over the Reins to an Heir
The sentimental value of keeping a business within the family can be compelling. If your child shares your passion for the business, you could secure generational wealth by passing it down.
But be cautious, family dynamics can get complicated. Legal battles and rifts among family members can ensue if the succession plan isn’t clear and inclusive. If you’re leaning towards this option, have open discussions with all family members to minimize misunderstandings.
Pros:
Keeping the business in the family
Potential for generational wealth
Cons:
Risk of family conflict
Legal complications if not planned well
Selling Your Business to a Co-Owner
If you co-own your business, selling your share to your partner can be a simple, straightforward process. A business valuation sets the groundwork for the sale, but it’s essential to plan for your exit well before it’s needed. This strategy allows you to cash in on your years of hard work and can also provide a financial cushion for retirement.
Pros:
Quick and straightforward
Financially beneficial
Cons:
Loss of control over the business
Valuation can be less than expected
Leadership Succession With Existing Employees
You don’t always have to look far for a capable successor. Sometimes they’re already on your payroll. Leadership succession planning involves identifying and training an existing employee to take over. This method is often the least disruptive, as it provides a smooth transition and maintains business continuity.
Pros:
Seamless transition
No need to acclimate a new leader
Cons:
Requires substantial internal infrastructure
More suitable for larger businesses
Selling to an Outside Party
If family succession or internal leadership planning isn’t feasible, selling your business to an external buyer is always an option. A strong brand and a steady customer base can make your business an attractive investment, giving you a financial windfall as you step away.
Pros:
Potential for higher valuation
Complete exit from the business
Cons:
Loss of control over future business decisions
Risk of the business diverging from your vision
Buy/Sell Agreements: The Safety Net
A buy/sell agreement, facilitated through life insurance, is another small business succession tool. It’s a pre-arranged agreement detailing how shares will be bought and sold upon a business owner’s departure, retirement, or death. The two main types are cross purchase plans and entity purchase plans, each catering to different business structures and needs.
Pros:
Provides a clear roadmap for future ownership
Can accommodate multiple business owners
Cons:
Complexity in execution.
Variability in life insurance costs.
Secure Your Legacy Today
Your exit might be the last chapter in your business journey, but it’s the first chapter in your business’s future without you. The strategies you pick today will shape this future, so make your choice wisely. Whether it’s grooming an heir, selling your stake, or any other method, a well-thought-out plan will help you leave a lasting legacy while securing the business you’ve built.
Schedule Consultation Today!
We can help if you are ready to engage a Glastonbury or Westport, CT estate planning lawyer to develop your plan. You can send us a message to request a consultation appointment, and we can be reached by phone at 860-548-1000.
Mr. Karpe is licensed to practice law before the courts of the States of Connecticut and Colorado, the U.S. District Court for Connecticut, the U.S.District Court for Colorado, the United States Supreme Court, and the U.S. Tax Court. He is a member of the Connecticut and Hartford County Bar Associations as well as the Estate and Probate Section of the Connecticut Bar Association. In addition, he is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys and Planned Lifetime Assistance Network of Connecticut.