Succession Planning for Small Businesses
Seven tips to developing a successful transition plan.

By William E. Lowe

As a small business owner, you’ve worked hard to build your business, to establish goodwill with your customers and to fulfill the American dream of business ownership. A well-thought-out succession and transition plan will ensure a meaningful and profitable legacy for you, your business and your family. Here are seven tips to consider when developing your succession plan.

Review or Create Your Mission Statement
Begin the succession planning process by reviewing or creating your mission statement. Your mission statement should identify the key elements and values that you believe lead to the success of your business. The mission statement serves as a useful reference tool to guide your business in the future. If you share ownership of the business, a mission statement can also be a helpful tool to focus all owners on one unified value proposition.

Ask the Tough Questions
Determining your business succession strategy involves asking some tough questions. The answers to these questions provide the framework for your succession plan. In addition, this process often leads to a discussion of whether to plan for the sale of your business now or in the future, as opposed to passing it on to family members.

•    How much of the mission of your business is solely dependent on you?
•    Do you have the right people in place to carry forth this mission in your absence?
•    How much longer do you want to be involved in the business?
•    How do you define success for your business?
•    What are your personal and emotional attachments to your business and how might they influence your overall decision-making process?

Create Your Estate Plan
The next step involves making personal decisions on how to handle your estate. These decisions should be based on your family and your desires, and may be completely separate and apart from your business strategy. With family businesses, the coordination of your estate plan with your business succession plan is essential. If your business is family-owned, consider the following questions:
•    How will you deal with those members of the family who are involved in the business and those who are not?
•    Is mathematical equality among family members necessarily fair (or even desired) based upon their involvement in the business?
•    If the business is your major asset, how will it be used to provide for your family’s cash flow needs (including potential tax liabilities) when you are gone?

Consider the Appropriate Form of Ownership
Remember, your ownership in your business is an asset similar to other investments, such as stocks, bonds, mutual funds, etc. This means that what happens to your business at your death depends on how your estate is structured.

At the very least, you should consider creating a revocable trust to own the business. If the ownership of your business is solely in your name, then it will pass through your will and be administered by the probate court. The probate court is the division of the county court that oversees the administration of estates. There are costs, delays and publicity associated with the probate process that many business owners choose to avoid. A way to avoid the probate process is to hold ownership of the business in a revocable trust.

Review Your Partnership and Buy-Sell Agreements
There is often a partnership agreement and/or a buy-sell agreement that governs the disposition of the business at the death of you or your partner (which could include your children or other family members). A well-crafted partnership agreement or a separate buy-sell agreement establishes a series of guidelines on how a particular owner’s interest is to be disposed of based upon various triggering events.

These events may include that one owner wants out, the divorce of an owner, termination of employment, death of an owner, etc. Other items to include are payment of dividends and cash distributions (to cover the taxes on undistributed earnings) and a clear statement of who is responsible for the debt in the event that the business faces financial troubles.

Determine Your Valuation Method
The valuation clause in your partnership and/or buy-sell agreement is very important when thinking about the transfer of ownership of the business. In most agreements, book value or the cost method is used. Another method of valuation is based upon a mutually agreed upon price between the shareholders.

Communicate Your Plan
Open and honest communication between all owners and family members is essential for the successful implementation of a business succession plan. Consider having this dialogue in advance of the drafting of the buy-sell agreement to allow all parties to have their concerns and issues specifically addressed in the agreement. This communication may be helpful in creating a cohesive business culture to guide the future direction of your business.

You have worked hard during your lifetime to develop a successful business. With a little extra work today, the development of a business succession plan and the coordination of such plan with your estate plan will provide for the orderly transition of your business and personal assets to the next generation.

William E. Lowe, JD, MBA, CF, is a private client senior officer and senior vice president in the Private Client Services division at UMB Bank. He can be reached at (816) 860-7739 or .