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It happens all too often that when a small business owner wants to retire they realize that they have no exit strategy. Sometimes the lack of an exit strategy is due to the expectation that a child will take over running the business. Unfortunately, what often gets overlooked is that not having an exit strategy can leave that child in a situation where much of the business is lost.
The sooner a small business owner recognizes the need for an exit plan (aka a succession plan), especially if that plan is simply to transfer the business to their kids rather than sell it off, the better off the business will be. The following checklist, while broad, should help small business owners plan their exit and transfer the business to their kid(s).
Decide When First
The first step in planning your exit from the business is to decide when you want to retire. While you may think now that you want to work until the day you die, when parts start falling off, you'll probably change your mind. Having a plan in place for an unforeseen decline in health is not only prudent for your business and customers, but also for any successor.
If you set a date, it does not need to be set in stone, but it will provide a deadline for making sure your successor is ready and up for the task of taking over. Also, having a date will allow you to put together a plan for what to do if you need to affect a transfer sooner.
Decide Who and Why Second
After you figured out when you want to hang it up, you need to know to which child you'll be turning over the reins. This is easy if you only have one child, but if you have more, this becomes more complicated. That's why you need to decide why control of the business is being passed on to the child you chose. This decision may involve hurt feelings, irrational emotions, and even big family arguments, but by having a clear, rational and well thought out explanation of why you chose the child you did, it will help to ease the emotional turmoil.
Additionally, choosing one child to run the business does not require cutting off other children. However, you don't have to only choose one. Providing non-controlling children with shares or interest in the business can help to avoid hard feelings, or requiring the successor child to buy the interests over time is another option that can be discussed. To help you make the right decision for your family and business, discussing the options with your family is advisable.
Lastly, Decide How to Effect the Transfer
To figure out exactly how you want to affect the transfer is not something to do alone. Getting the advice of both a business lawyer and accountant is important in developing your plan. After you know when, and to whom, you want to transfer control of your business, figuring out how to effect the transfer while navigating tax laws is the next step.
While many decisions can be made on your own, these decisions may be ones that should be discussed between yourself and your spouse and your children. Especially when deciding which child you want as a successor, it is best to gauge interest before telling a child you want them to take over your business.