Similar to estate planning, business succession planning is more effective when people take care of it long before they think it is necessary. The process of passing the family business to one or more heirs could take 10 years or more, and without the plan, they may not be ready or willing to step up to the task.
The American Bar Association provides a blueprint that can guide business owners through the early phases that good succession planning includes.
Inventory and valuation
The plan should include documentation for all assets and debts as well as other business records. Valuation of the family’s interest in the company and its assets is also necessary for the records. Assumptions are not adequate for the planning process.
Continuation plan
The owner and any family members already involved in the company should have powers of attorney and other documents in place. These identify who is responsible for decisions and tasks in emergencies such as incapacity or an unexpected death.
Restructure plan and key contracts
While the current business structure may work well now, the transition may be easier with a different structure and tax treatment. Including this change at the point of succession may require renegotiations of the company’s contracts with third parties.
Estate planning
After the business succession planning is complete, the owner needs to update estate planning documents such as wills and trusts to reflect asset transfers and other matters.
Retirement planning
Ideally, the plan will go into effect when the owner retires rather than at his or her death. Identifying interest, assets and financial support to retain for a comfortable retirement while passing a financially stable business to the next generation is an important balancing act.
These guidelines support the development of a plan for the future, and even though the essentials are somewhat hypothetical, it provides a basis for updates that keep it relevant.