Many people put off planning for obvious end-of-life mechanisms, let alone those related to business ownership. Even if an unfortunate event isn’t the cause, you may want or need to close your business or transfer your ownership or managerial power to another person or entity. To ensure you maintain control over the exit process, it’s necessary to have in place a business-succession plan allowing for the continuance of operations without interference should you no longer own and direct the business.
While every business needs to be evaluated individually, there are three general areas of focus:
• Transfer method and corporate structure. When it’s time to transfer your interests, you’ll need a strategy. There are several options you should consider, depending on what’s in your business’ best interest.
You can sell your business through an outright sale (where your interest in it and payment for it will transfer immediately) or a gradual sale (where you give certain rights to the new owner and payment is prearranged through a long- or short-term payment plan with the entire business being transferred upon the final payment).
Additionally, you can transfer your business to a new generation. To do so, you’d need to allow for tax consequences on the sides of both parties in the form of estate or gift taxes.
You should also have business agreements, licenses, insurance needs and all other requirements for the business in place to allow for a transfer.
• Estate planning. It’s important to have documents in place that reflect your desires upon your passing or incapacity. These documents should, among other things, name whomever you wish to own or manage your business in the event you are unable to. This requires an extensive review of all candidates, including family members. At a minimum, you should have a will, a trust, power of attorney for medical and financial decisions, and property documents.
• Exit strategy. You should have a plan that allows for a smooth transition for your business. First, establish a timeline for the succession plan. This includes laying out a retirement plan (continue working with the company, establish a new company, work for another company, travel, do community service, etc.). This also gives your employees notice to allow them to adapt to the change. It’s most people’s desire to install a successor himself or herself to verify the business is operated according to the plan. This also allows for hands-on training for the successor, which generally helps with the success of the business.
At a minimum, the three areas mentioned above should be discussed with a CPA and an attorney to assure a smooth transition of your business under any circumstances.
Brooke Borg is a partner with Las Vegas law firm Borg Law Group.