5 Tips For A Smart Succession Plan

Written by: Brady Drake

Owners and co-owners of a business get to enjoy the unique satisfaction of being their own boss and creating opportunities for others. They also have the satisfaction of having some measure of input into who will carry on their legacy. 

Passing on the ownership of a business is a complex and multifaceted undertaking, often raising questions about what is family or business property, and putting personal relationships and promises in the spotlight. Fortunately, with proper guidance from an advisor, owners can design a fair and clear succession plan. Here are five tips to help make it happen:

1. Start planning earlier than you think you need to

Sometimes succession is unexpected, from a passing or sudden retirement. Often it has been pondered for years. But even when time is allowed, a surprising number of owners still haven’t made clear plans. Make a succession plan an early part of your business. With proper time, advisors can help ensure a fair outcome for everyone.

2. Don’t make assumptions about family succession

Many entrepreneurs assume their successor will be a member of their family. But even in the best cases there is work to do – ensuring other family members do not feel left out, and helping ensure successors are actually up to the job. And sometimes, the person expected to take over isn’t interested. These are not questions to answer under duress, so start succession conversations early. 

3. Make sure titling and intensions are clearly spelled out

Clear, closely reviewed documentation of ownership and succession is a must. Many joint partners assume ownership transfers to the surviving partner if the other passes – but without clear guidance, the family or beneficiaries of the former co-owner come into the picture. Even a misplaced comma can muddle the picture. Bring in an advisor to review documents and make sure they say what you intend. 

4. Consider transferring assets gradually 

One benefit of early succession planning is the opportunity to maximize the transfer and minimize taxes on the business as it changes hands. There are many tools available, including gradual transfers of assets over years so certain income thresholds aren’t exceeded. This is a smart move, but it only works if you have a plan ready in advance. 

5. Line up the money needed to the plan happen

In most cases, ownership transfers involve some sort of exchange. A retiring owner sells his or her share to a partner or successor, even within the family, or bequeaths the business – and its tax burden – to a beneficiary. In these cases, the receiving party needs assets to complete the transfer. Arrange with an advisor and loan officer in advance to make sure the right person has the right funds at the right time. 

The best first step is to ask yourself what your long-term plans are. Whether you see yourself moving on in a few years or dedicating a lifetime to your business, you will need a plan – but maybe not the same plan. A business advisor from Alerus can help you navigate the options available and help set up a plan that will serve you – and your successors – for years to come. 

The information contained herein is general in nature, is provided for informational purposes only and not intended to provide legal or tax advice or recommendations for any particular situation or type of retirement plan. Alerus does not provide legal or tax advice. Always consult your legal or tax advisor regarding your unique situation.

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Brady is the Editorial Director at Spotlight Media in Fargo, ND.