5 Tips for Passing Your Small Business on to Your Heirs

If you want your business to stay in the family, firm up your succession plan well in advance and avoid these pitfalls.
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A succession plan is an important part of passing your business on to heirs. It should outline the development and training the next leader needs. (Photo: Diego Cervo)

As with so many sensitive subjects, it seems there’s never a “right” time to think about passing your business on to your heirs. After all, that probably seems many years away, and you’re busy running the business in the meantime. But unless you’re planning to just let the government sort it all out for you, there’s no time like the present to start preparing for a smooth transition.

“Beginning the planning way too late, such as after you suffer a health crisis, isn’t planning so much as panicking,” said Grant Toeppen, an estate planning attorney in California.

Toeppen and other experts shared these tips to help you do a little more planning and a little less panicking.

Prepare your heirs gradually

The best successions are laid out well in advance — often years ahead. Planning early will give you time to groom your heirs so they’re ready to take the reins when the time comes.

You’ll want to make sure they have the breadth of knowledge necessary to manage the business, which means giving them tactical experience at multiple levels of business as well as teaching business principles. They should be no stranger to a profit and loss statement, for example, and understand the importance of a strong balance sheet.

But working for you should not be the sum total of their business experience.

“For a number of reasons it is extremely important for children to get work experience outside the family business before joining the business. This builds up their confidence and credibility,” says Laura Michaud, a family business consultant at The Michaud Group.

Write down a succession plan

Michaud said your succession plan should outline the development and training the next leader needs. “I actually have an eight step succession planning program that I walk my families through that clearly delineates what each step should be, with milestone actives and a timeline.”

These steps include establishing a mission statement for the future of the business, listing potential successors, assessing those candidates against objective criteria and creating a training plan. Another step should be communicating with customers, suppliers and employees about the transition and the continuity of the business.

Document every aspect of the business

Don’t leave the next owner to reverse-engineer your policies, tasks and procedures.

“Get every aspect of the business documented. Ensure that everything you know about your industry and particular business are written up and passed on to the people in the company who need that data,” recommended management consultant Chris Scully.

Commit to a transition date

When is the right time to transfer the business? “When the successor is ready” is one answer. But Toeppen said you should lock in a particular target time in your own life.

“I’d strongly recommend having an age set in writing ahead of time, say 65 or 70, with an incapacity provision in the operating agreement just to back it up.” Some people depend on a finding of incapacity by a physician — but that’s far too late, according to Toeppen.

Keep death taxes in check

The so-called death tax is a critical consideration. Depending on where you’re located, it can loom over your estate at both the state and federal level. It’s important to work with a tax consultant to minimize the effects of these taxes.

“I was a third generation family member for Beltone Electronics. This is the very reason we sold our company — to be able to pay the estate taxes,” said Michaud.

If an estate is valued at more than $5.5MM, the additional amount is taxed at the federal rate. “Many companies’ value well exceeds that amount,” she said. In these cases she advised giving the maximum yearly gift of $14,000. This money builds up over time in the future heirs’ estate and allows the increase in the company’s value to accrue there.

You can pass on company stock instead, which may allow you to give more than if you gave cash because you can discount the stock value. One negative to doing this: The company will have to have a valuation usually every other year to prove its value.

Involve the right professionals

Working with the right team of experts will help ensure a smooth transition. You’ll need an attorney to handle all the legal paperwork necessary to transfer ownership or control. An accountant can help minimize the tax impacts.

Scully advised working with a financial planner, too. That planner “should be involved early to help you prepare for retirement with a retirement plan that fits your retirement goal,” he said.

Lastly, consider working with a management consultant who can help navigate the operational aspects of making the transition and help ensure your heirs are poised to assume command and grow your business.

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