Succession plans are as individual and unique as your own circumstances, but one of the key components to any successful succession plan is the selection of qualified people to manage the business after your retirement.
The successor could be any one of a number of options, including:
- Child/children (whether currently active in the business or not).
- A group of key employees.
- Outside professional management.
From a financial point of view, your choice of successor will impact how long you will want to be financially tied to your business. Your level of comfort with the successor, and your possible continuing involvement in the management of the operations, may impact whether you cash-out the value of the business immediately or on a deferred basis.
CHOICE OF SUCCESSOR
Your choice of successor will impact the value and future success of your business. Therefore, assuming the value of your business forms a significant portion of your family’s net wealth, if your cash-out of that value is on a deferred basis, the choice of successor could significantly impact the comfort of your retirement. On the other hand, if the operation is being passed within your family to the next generation, you may not want to saddle the business and/or the successor with a significant amount of debt in order to fund a buyout of your investment in the business.
The choices you make regarding the financial divestiture of your investment in the business will also impact the taxability of the appreciation in value of your investment in the business. The transfer may be accomplished in a number of ways, with a variety of levels of taxation ranging from a complete deferral of tax, to the full increase in value being immediately taxable as a capital gain.
Another key success factor for your succession plan is to start your planning early. Starting the planning now will allow time to groom both the successor and the operation. It will also allow you to properly structure your financial affairs for the transfer of ownership, thus facilitating a smooth transition.
This is a brief discussion of issues to consider in your succession planning. We recommend that you contact a professional advisor to begin devising your succession plan, or to review your existing planning in light of changes to your circumstances and applicable income tax legislation.