The initial aspect of developing a successful transition plan is understanding your business management and what type of business you own. Is it: owner dependent, multigenerational or marketable?
Many businesses are started and run by one individual expert and close when that founder retires or passes away. Those are examples of owner-dependent businesses. Usually in an owner-dependent business the management focus is generating the highest income each year so the founder can take out profits. Often there is no expectation that the business will continue once the initial founder leaves and as a result, little effort is devoted to developing a strong independent management team.
Often lawyers, accountants, physicians, dentists, architects, etc., particularly in small practices, choose to operate their businesses under the owner-dependent model, as do many general contractors, local restaurant owners and countless other businesses.
The decision to be an owner-dependent business should be a conscious choice, not an oversight because with sufficient planning most businesses can become multigenerational.
As the owner of a small business, you should investigate all options and choose the plan that best fits your personality, business operations and goals.
If your business is operating under the owner-dependent model, you are likely to have centralized control, with all decisions requiring your direct involvement. All elements necessary to make the business succeed, for example, marketing, professional services, operations, etc., are in the sole control of the owner. All other employees, if any, are essentially clerical support.
The owner-dependent business can be highly profitable during its existence since little is spent on payroll, training or other infrastructure. The fact that the business will literally die with its owner is offset by the potential for increased profitability while the business is in operation.
The fact that the business will end when the owner retires or dies does not mean the business can be ignored for retirement or estate planning purposes. During the years the business is in existence, steps should be taken to minimize the risk of premature loss via retirement planning, including disability insurance, life insurance and the like. Plus liability arising from the actual business activity should be considered. This planning is often accomplished through a combination of liability insurance, engagement and similar such employment contracts dealing with issues of liability and indemnification, and the use of a limited liability entity (corporation, LLC, etc) to shield the owner from personal liability.
Upon cessation of the business operations, the owner, or his surviving family, may wish to evaluate continuing liability insurance for a reasonable period of time. If the termination of the business results from the death of the owner, the family should consider appropriate procedures to limited liability by reducing, to the extent possible, the applicable statute of limitations (the period during which clients or customers can sue for alleged harm caused by the business). An estate planning or trust administration attorney should be consulted regarding formal trust administration or probate procedures to achieve this goal.
Finally, an often-overlooked issue while the business is in existence is taking the steps necessary to document the intent to terminate the business upon the owner's death or retirement. Although the business may, in fact, become worthless upon the owner's death, estate tax may theoretically be imposed on the value of the business on the day before the owner died. If the owner's death is unexpected, for example, due to a sudden illness, the business may be thriving immediately prior to the owner's death. To minimize the risk of the surviving family members owing estate tax on a business that no longer exists, it should be documented via the business plan and the business' governance documents that act to limit transferability of the business.
If the business is multigenerational or marketable, then succession planning is of significant importance and tools such as buy-sell agreements, insurance, and interim management planning should be considered with professional guidance so that the business transfer can be made with as little disruption and dimunition of company value as possible.