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The UPS Store Small Business blog
  • 08 November 2021
  • Liam Edwardson

A Small Business Owner's Guide to Succession Planning

Perhaps you are looking to retire in a few years. Perhaps you have spent decades at the helm of your small business and are looking for new challenges. It may be time to start preparing for succession.

woman working on laptop

Succession can be triggered by many factors: retirement, changing market conditions, mergers, rifts with partners, unforeseen life changes such as disability, and other dynamics. A good rule of thumb is to start succession planning at least five years before your retirement or transition date.

The following steps may help ensure a smoother transition.

Conduct a complete valuation of your small business

The first step of succession planning is to make a complete list of your small business assets. This includes equipment, inventory, real estate property and intellectual property. Next, estimate your income, including the total of your current revenue streams, and your earnings potential in future years.

For most businesses, the majority of the value is not really in their hard assets but in their intangibles and goodwill. The true worth of your small business could influence your decision on whether to transfer or sell. There are several transition options to consider.

Transfer the business to an heir or heirs

For small business owners with families, handing them the reins to a successful, fully operational enterprise may seem to be an obvious choice, particularly for those with children or family members already working in the business. However, passing your business on to an heir is not without challenges.

One may have a clear-cut successor in mind, but if multiple family members are interested in taking over, complications, hurt feelings and, power struggles may ensue.

Once you have decided who the successor(s) will be, delineate clear instructions on who will take over and how other heirs will be compensated.

If you have heirs who are not active in the business, you may choose to include a buy-sell agreement that allows to them sell their shares to those who are active.

If many heirs are involved, and only one will take over, you should write out clear instructions on how the leadership structure should look moving forward.

Sell to business partners

Selling your share to your partners requires that proper agreements be in place. There is usually some sort of language that states in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase the business interests from that owner’s heirs.

This buy-sell agreement ensures fair compensation is given and allows the remaining co-owners to maintain control of the business. It can also help ease the burden of an unexpected transition — for the business and family members alike.

A buy-sell agreement caveat: A large amount of cash may be required to be kept on hand because your co-owner should be prepared to buy out your shares at any moment. Usually, small businesses fund this plan with relatively inexpensive term life insurance. Permanent life insurance is a bit more expensive, but in the event of retirement or disability, it can provide a payout. The company can also purchase key person insurance that pays out in the event a partner dies or becomes disabled. Consult an insurance expert to find the right policy for your needs.

For a business with multiple owners, you also have the option to sell your ownership interests back to the company and then distribute them to the remaining owners.

Sell to a trusted employee

If you are concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer. Employees who are good businesspeople and well-respected by your staff could help make the impending transition as seamless as possible.

As with selling to a partner, succession planning focusing on a key employee calls for a buy-sell agreement. This agreement will state that your designated employee will purchase your business at a designated retirement date or in the event of death, disability or other event that leaves you unable to manage the business.

Now, the vast majority of your staff most likely will not have the finances to buy the business they work for. In this case, you could consider seller financing, in which your employee pays you (or your beneficiaries) back over time. Usually, a 10% or higher down payment is specified, followed by monthly or quarterly payments that accrue with interest until the stated amount is paid in full. When planning for a succession, the exact terms should be spelled out explicitly.

Sell to an outside buyer

Every owner would love to sell their small business to the highest bidder at the highest value. Reality check: Pinpointing a buyer to accept your price and terms within the time frame you choose is far from easy.

Is your business independent enough that it can keep running without you having to stay on? That is of significant value to potential buyers. Understanding other key value drivers that make a business more or less attractive to acquirers, and taking positive steps toward improving those drivers, can turn the selling process even more in your favor.

Consider small business succession planning providers

If your small business is simply structured, a local business attorney may suffice to draft paperwork. If the structure is complex, opt for a local CPA. For businesses of a moderate size with many employees and complicated structures, try the PwC.

For small businesses, including a sole proprietorship, business owners might consider seeking services like Service Corps of Retired Entrepreneurs (SCORE) and Small Business Development Centers (SBDCs). Advice from these entities goes above and beyond financial, essentially acting as mentors for small businesses.

A quick suggestion: If you plan on retiring once the succession is complete, you should ask your CPA or tax advisor regarding deadlines for contributions to retirement funds prior to retirement.

If selling, prepare your business in advance. Double-check your finances, get your operating procedures in order and perhaps hire transition managers. Do everything you can to make your business stable and thus more attractive to outside buyers.

Revisit your plan regularly

Over the years, key employees may quit, designated heirs may pursue other interests or other circumstances may crop up. Reviewing your succession plan every so often will help ease any transition speed bumps along the way.


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