A Business Owner’s Guide to Succession Planning

By Nicole Young on November 20, 2023

What you should know about succession planning as a Business Owner.

As a small business owner, you’re accustomed to juggling a number of responsibilities. While focusing on day-to-day operations and meeting deadlines tend to be top of mind, there’s another critical aspect to business ownership that often takes a back seat but shouldn’t: succession planning.

If you haven’t created your own, you’re far from alone. In fact, just 1 in 3 family-owned US businesses have a robust and documented succession strategy, a survey by PwC found.¹ Neglecting this responsibility can leave your business, your employees, and your family at risk should you suddenly or unexpectedly find yourself unable to lead.

You’ve invested time and effort into building a successful business; now it’s time to preserve your legacy while ensuring stability for your teammates and loved ones down the line. Here’s what you should know about succession planning.

Why Succession Planning Matters

Succession planning is vital for ensuring operational continuity once you retire or otherwise step away from your business. It involves designating key employees, detailing their roles during the transition, and identifying a successor (or successors) to assume the mantle.

Many owners postpone succession planning, often due to the time constraints or emotional challenges it can present, but doing so can lead to problems for all of the people who depend on you. Uninterested or unprepared family members may struggle with financial obligations and legal issues, while employees face uncertainty.

By taking the time to outline your succession plan in advance, not only can you ease the burden on those who rely on you, but you can also ensure your own security in retirement while managing potential tax exposure.

Considerations for a Smooth Transition

Your succession plan should always reflect your personal goals for the future. Ask yourself: What do you want the plan to accomplish? Typically, you have the following succession options to choose from:

• Transferring to a family member, employee, or partner.
• Selling to a third party.
• Closing and liquidating the company.

If you do decide to name heirs, you’ll need to decide who in your family is prepared to operate your business. If more than one heir is interested in running the company, you’ll also need to determine how those family members will distribute profits.

There are several ways to go about selling to an employee or partner. For instance, you can finance the sale over several years as you train your named successor, ensuring they are fully prepared to take on the job. In many successful transitions, ownership doesn’t simply switch upon the death of the owner — rather, the transition occurs over a period of time, potentially phasing in the successor based on certain milestones.

Selling to an outsider or liquidating your company will require some work in advance to maximize your profits. From organizing your records to potentially marketing your company to buyers, you may need additional professional support during the process.

Tax Implications

Since your business is likely among your most valuable assets, your succession plan for it is also a key component of your estate plan. No matter which route you choose to pursue, be sure to plan for the taxes you’ll incur upon the sale or transfer of ownership. Consider which strategy best suits your needs and take proactive measures to manage your tax burden prior to the time of sale.

Getting Started With Your Succession Plan

Planning your succession doesn’t signal that you’re ready to ride off into the sunset. On the contrary, it shows your employees and loved ones that you’re committed to building a stable long-term future for them and your business (assuming you intend for operations to continue). A comprehensive plan provides you with retirement confidence while allowing the vision you have for your business to remain in place.

Once you decide on a path, document everything comprehensively and share the plan with stakeholders and potential heirs to minimize the likelihood of future disputes. Communicating your vision (and changes to it) with the relevant parties can help keep everyone aligned over the course of the transition.

If you’re ready to start putting pen to paper on a succession plan or would like to discuss your options, think about connecting with a financial advisor who can help you navigate the process with confidence.

¹ “PWC’s 2023 Survey of US Family Owned Business.” PWC.com, May 16, 2023. https://www.pwc.com/us/en/services/trust solutions/private-company-services/library/family-business-survey.html.

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Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.