Have a small or medium business? You need a succession plan

If you’ve started a business from the ground up, it may have become part of your identity — the fulfillment of a dream. Have you considered what would happen if you suddenly became incapacitated and could no longer run the business? Have you arranged for someone to take over when you die?

If you watched the HBO series “Succession” earlier this year, you have an idea of what a worst-case scenario might look like. Without a rational succession plan in place, family members may struggle for control of their business. Yes, the situation is dramatized, but the reality is that it can be difficult to begin a conversation about succession.

In fact, a recent study of 200 businesses found that more than half — 58 percent — had no succession plan in place, including 47 percent of business owners who are 65 or over. Seventy-eight percent explained that they were too involved in managing the business to think about succession. Another 44 percent said succession seemed “too far in the future” and 42 percent said they were too busy to make a plan.

Yet a succession plan is about more than avoiding family infighting. It can play a crucial role in a company’s survival during a period of transition.

Most fundamentally, a succession plan lays out the transfer of ownership and control in case you die or become incapacitated. It’s much like a will for your business. You should already have operating documents in place that spell out who owns how much of the company and how those people can transfer their interests. A succession plan goes one step further and directs how that transfer will occur.

For example, the plan may include an approved but unsigned buy-sell agreement allowing your chosen successor to buy your share at a predetermined price. In such a case, the agreement could also be used to establish the value of the business for estate tax purposes.

If you plan to leave your share to a successor as a gift or in your will, be aware that the transfer may be taxable. Where will your successor get the money to pay those taxes?

Another key aspect of succession planning is laying out an operational chain of command. Consider the situation practically. Are there sufficient personnel in place to step into your role? Are family members interested, available and qualified? Would there be disagreements about who steps up?

The best time to get started on a business succession plan is right away. Consider it your responsibility as a business owner — having a succession plan in place can save your heirs and colleagues a great deal of trouble.