Key strategies to initiate succession planning for small businesses
For small business owners who may be considering the next stages of their lives, succession planning is a key step in standing down from your small business and/or transferring ownership of your business. While the process may be complex, determining ways to transfer ownership of a business can be rewarding, provide peace of mind and is key in planning for the future. Among those options, small business owners can choose to sell their business to family members or outside parties, sell their shares to a co-owner (if applicable), or extend employee ownership.
Selling your business to family members or outside parties
Selling your small business to a family member or outside party can be an avenue to plan for the future. Entrepreneurs will need to accurately calculate the business value with an appropriate entity, showcase its footing in the marketplace and/or community and prepare a balance sheet that demonstrates the earning potential. You can learn more about how to value your business here.
Some types of businesses can be easier to sell, while others may require more planning and estimation. If you’re selling a local coffee shop, restaurant or small boutique, it may be easier to demonstrate your business value. On the other hand, if you have a business that’s been built on a family legacy, it may be less attractive to outside parties since it may require a good portion of remarketing and rebranding of the business. Selling your small business to family members may be easier in this case.
NOTE: The SBA has put together a guide on closing/selling your business to help you prepare about what’s ahead and what steps you may need to take to sell your business.
Selling your business to a co-owner (if applicable)
If your small business is owned by more than one person, a good succession plan is to sell your business to your co-owner. Depending on how you set up your business in the beginning, you may already have a buy-sell agreement in place for your business. This can expedite the succession planning process, and remove the burden in case of an unexpected need for succession planning.
Whether you decide to extend employee ownership in your small business, sell your business to family members or outside parties, or sell your business to a co-owner, it’s important to consult with a lawyer or business assistance provider to guide you through the complex process of succession planning. To find a business assistance provider near you, you can use our interactive map.
With employee ownership, small business owners can keep their businesses and the employment opportunities within their communities. It also creates a path to business ownership for low-income workers and workers of color. When successful businesses become employee-owned, they become even stronger by creating high quality jobs that can help families build assets, with compounding benefits to communities.
There are different approaches to employee ownership. One option is Employee Stock Ownership Plans (ESOPs), which are retirement plans that own all or a portion of a company on behalf of its employees, and are the most common form of broad-based employee ownership in the United States.
Another option for employee ownership is worker cooperatives. Worker cooperatives are only owned by employees, who share profits, and can elect and serve on the board of directors.
In addition, employee ownership can also be set out in the form of Employee Ownership Trusts (EOTs). EOTs can be a more flexible form of employee ownership, and can adapt more democratic principles and participate in profit sharing.
To learn more about the different types of employee ownership and its benefits to employers and employees, check out Project Equity’s work helping small businesses with these types of arrangements.