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Start-Ups

How to Hand Over the Business to a Successor

By Townes Haas   |    September 29, 2014   |    10:27 AM

The Importance of Succession Planning

Small business owners are busy people: busy running and growing their business. Family businesses are no different. This often means that business owners aren’t thinking about passing along the business to the next generation to run. Succession planning isn’t necessarily top of mind, but it should be.

Why a Plan is Necessary

Without a succession plan, a family business may falter or fail in the future. If the business is passed to the wrong successor, that person may not care enough to worry about the future success of the business. Or the person may not have the skill set to effectively run it.

Succession planning ensures that the business is in the right hands and helps ease the current owner into retirement. It also helps determine how much the business is worth and how the business will be split amongst interested parties after the owner retires or dies.

Tips for Creating a Succession Plan

The planning process can be daunting, but it’s a necessary evil if a family business is going to outlast the current owner.

  • Pick a successor: The first step to any succession plan is actually selecting a successor. It might seem obvious to give the business to the oldest child or the nearest relative. Oftentimes, however, these people are simply not interested or don’t have the skill set to run the business. While family owners may have several children or relatives that want to run the business, it’s best to pick a single successor who has both the interest and capabilities. Think about the business and not just family dynamics.
  • Decide when to start handing over the reins: Generally, this should be done before the current owner retires. This gives the successor time to learn how to run the business while the current owner is still involved. Then, day-to-day tasks can be slowly turned over. According to The Law Donut, turning over the family business “sooner rather than later” may be good for tax planning.
  • Share “shares”, not ownership: Splitting management duties can be troublesome for the company. It’s best to divide shares of the company between children and relatives. A shareholders’ agreement should also be prepared, and consider giving different children different rights.
  • Determine what the business is worth: The current owner should get a cash-out payment from the business. A certified public accountant (CPA) can help value a business. Or the owner can make an agreement with interested parties on what that value should be. Estate planning should be an integral part of this process.
  • Groom the successor: Before the family business is arbitrarily turned over to a successor, the new owner must prepare for the task. Months or preferably years before the person takes over, he or she should be introduced to major clients, vendors, partners and colleagues. The successor should be seen leading meetings, interacting with employees and generally leading the company. It will inspire others to follow the person and trust him or her with the future of the business.

Succession planning should start early – years before the owner wants to retire. This will help make sure that everything is in place long before the current owner’s final day.