extending the life of your business - the importance of business succession planning
Succession planning is important, especially for small and family businesses. When done properly, it allows for a smooth transition and alleviates any negative effects of the departure of the owner or key person because of retirement, illness, disability or death.
Succession planning depends on the needs and wishes of the business owner about the future of their business. This process requires proper estate and business planning. There are many factors to consider especially when the business generates the majority of wealth of the owner’s estate.
When thinking about your business’ succession plan consider the following:
- A suitable successor
Select a suitable successor who is interested and capable of running the business and who agrees to your expectations of them.
- Managing debt
Some business owners may take credit for business operations. This may pose challenges when the owner dies or becomes disabled as creditors may demand payments of the outstanding loans from the personal estate of the business owner.
- Minimize your estate duty
Use appropriate business assurance cover that minimises the tax consequences of transfer of ownership of the business and its assets.
There should be sufficient liquidity in your estate to address the tax implications and expenses that apply in the case of your death.
One needs to take note that succession planning and transfer of an estate’s assets can happen at different times, even though they are connected, they are mutually exclusive. Succession planning may occur when the owner reduces their input or share in the business due to retirement or factors like ill health whereas estate transfer can only take place at death.
As with many things in life, timing is important. A succession plan will have a greater chance of achieving the desired outcome if the process is started early in the business lifecycle.
Some common mistakes to avoid in succession or estate planning:
- Delaying the process of succession planning could make things difficult for the continuity of the business.
- Not maintaining one’s estate plan as one’s financial circumstances change.
- Leaving behind the business assets equally to the heirs could be difficult and not practical if all beneficiaries are not actively involved in the family business.
- Not leaving enough liquidity in an estate at the time of death can be costly if the expenses related to it are not covered. Cash is needed to continue the daily operation of the business prior to the estate being finalised.
Taking care of your wishes during your lifetime and after death is worth the investment especially when the desired outcomes are achieved.
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The material is not intended as and does not constitute financial or any other advice.
The material does not take into account your personal financial circumstances. For this reason it is recommended that you speak to an accredited broker or financial adviser to consider all your options and draw up a plan to achieve your financial goals.