Many owners of small businesses overlook the benefits of succession planning. Given all the day-to-day challenges of owning and running a business, finding the time to make a long-term plan can be challenging, to say the least. But without a succession plan, all your hard work and investment can be lost in a moment, if you or another essential member of your team retires, becomes incapacitated, or dies.

A recent survey by Wilmington Trust found that 58 percent of small business owners have no succession plan and that many of them have never even thought one was necessary. Combine that with the fact that Baby Boomers, who own 2.34 million small businesses, are reaching or surpassing retirement age or are dealing with age-related health issues, and it’s clear that a lack of succession planning is a major issue for the 25 million families they employ.

How to Begin Thinking About Succession Planning

Succession planning is especially complicated for family-owned small businesses. Founders’ dreams of the younger generation stepping into their parents’ shoes don’t always come true. Infighting among siblings (think Succession, the HBO hit series) can destroy not only the siblings’ relationships but also the business itself. And in some cases, the family member most interested in following in the patriarch’s or matriarch’s footsteps may be the one least capable of running the business.

In other words, it really pays to plan ahead, preferably with the help of a trusted lawyer who can guide you through all the intricacies. Here are five key questions to ask yourself before meeting with your estate planning lawyer about what to do with your business as part of your estate plan:

  1. Do I know what my business is worth?
  2. How can I maintain my lifestyle and that of my family during my retirement?
  3. If I retire, do I want to continue working for the business in some capacity alongside the new owner? If so, in what role?
  4. How can I provide for my family long-term?
  5. How can I plan for a situation where I become incapacitated? Or a key employee is incapacitated?

Options for Succession

Here are some of the options that I discuss with my clients when we plan for succession:

1. Transfer your business to a family member.

Is one of your children active in the business and an effective manager? If so, consider your other children who are not as involved—you may want to equalize your children’s inheritance among them. If you have business partners, dust off any relevant agreement that you may have signed when the business first began. What does it say about the death of a partner? Your partners may not want to be in business with your heirs.

2. Sell your business to your best employee.

If none of your family members can take on the business, chances are good that your best employees are the best candidates to buy it. You won’t need to guess how they’ll run the business in the future—you’ve already seen them in action. At the same time, be sure to think through interpersonal dynamics with other key employees and how that might play out if one of them is permitted to buy the business because of her or his “favored” status.

3. Sell your company to a third party.

Sometimes employees want to remain as employees and not take on the additional pressures of owning a business. Consider talking to a reputable business broker who might know or be able to find qualified potential buyers who are interested in your type of business.

4. Liquidate the business.

If you are a sole proprietor and none of the above options apply or appeal to you, selling your business assets and closing up shop may be your best move—done while you’re still healthy and able to manage all the decisions involved. Making these plans now, rather than postponing the question of business liquidation until after your death, will save your family a lot of stress. This presumes, of course, that no family member is interested in the business. Talk with a good financial adviser who can help you to assess how much income you’ll need to maintain your lifestyle as you head into retirement.

Please remember that any transaction involving the succession of your business carries tax consequences that should also be discussed with your estate planning lawyer. We can help you develop a good plan tailored to your situation and intentions.

Image: Danielle MacInnes