Identifying a successor is the first step in the planning process. Many owners of family businesses turn to an adult child, a grandchild or other relative to take over the reins.
Have you thought about what will happen to your business in the future? Although it's not an easy decision, the initial step in the planning process for small business owners should be choosing a successor. In many instances, this will be an adult child or grandchild assuming control of the business. A recent Kiplinger's Personal Finance article, titled "Retirement: plan to pass on a family business," encourages business owners looking at family members as successors to look at their qualities as managers and entrepreneurs. Someone may be a good manager, Kiplinger says, but may not have the ability to focus on the big picture or think strategically.
As soon as you have made your selection, start training that person to run the company. Ideally, this process should take three to five years, giving your successor time to earn the employees' respect and to be comfortable with all of the various parts of the business.
The next step should be to figure out how you will be compensated to start a stream of income for your retirement. The original article advises business owners to review all of their assets and income sources during succession planning to determine how much money they will need from the business to live comfortably in retirement.
Another critical part of the business succession process is estate planning. Giving shares of stock in the enterprise is a common way to accomplish this, and it is a tax-efficient way to transfer the value of a company.
Did you know that you can transfer shares worth up to $14,000 ($28,000 for a couple) to an individual annually without federal gift-tax liability? Any amount above this counts against the estate tax limits when you pass away. If you have a little time on your side—such as a number of years to plan—you can make these gifts, trusts, or partnerships. These strategies allow you to move a large portion of the business to your successors without giving up control until you are ready. Read about this and more in the original article.
Reference: Kiplinger's Personal Finance (July 4, 2014) "Retirement: plan to pass on a family business"