How to Pick a Succession Plan for Your Small Business

When your life's work is a small business, what happens to that business after you stop working? It's a question every business owner faces. Beyond your livelihood and legacy, you want your community to remain vibrant and your main street full of thriving businesses, not shuttered, empty storefronts.

As you assess your business and personal needs, identify potential successors, and consider various options, know that we're here to help. For over 60 years, we've helped small businesses open, thrive, grow — and plan for succession.

You might be kept up at night with some big questions: Do you want to pass your business on to your family? To employees? Do you want to sell? Do you want to exit quickly or have a period of transition? What do the next owners need — and need to know — to be successful?

Good news: You don't need to lose sleep when you've got us in your corner. A Fremont Bank small business banker can help you consider your priorities for the future. We're a constant in a time of change and can assist both during and after the transition.

A thoughtful succession plan not only addresses what will happen when you exit your business or pass away, but also anticipates various possibilities, such as divorce, incapacity, or the departure of a business partner. Reducing uncertainty is the key. This could be achieved in several ways. For example, the use of buy-sell agreements, life insurance, ESOPs, or other solutions could be effective. Essentially, succession planning is not a to-do list that’s separate from the rest of your overall wealth planning.  It’s part business planning, part exit planning, and part estate planning. Ultimately, you should review both business and personal documents, such as trusts and wills, periodically with your advisors because everything is interrelated.

Leandro Vicuña, JD, VP of Trust & Estates Group

Let’s explore a few succession paths.

There are three types of succession pathways worth exploring to maintain the legacy of your family business: a transfer to someone in your family, a co-op model that puts employees in charge, and a sale to someone outside the family

Transfer to Family

What is it?

A family transfer means gifting or selling your business to a family member — possibly at a discount (estate planning needs to be carefully structured).

Why would it be a good idea for a succession plan?

Many business owners dream of a family-owned business going on to the next generation.

Suppose legacy and continuity are more important than a big payout from a sale. In that case, a family transfer can be a great idea if there's an interested and capable family member. You might have family who already work in the business, but even if you don't, continued family ownership offers an opportunity to mentor and train up the next owners over several years and even after the transfer.

What does a business owner need to think about when choosing this plan?

If multiple family members are involved in the business or share an interest in ownership, ensuring fairness in decision-making and planning is essential to your succession plan. You'll want to define a structure for ownership, management, and decision-making to avoid conflicts and disputes down the line.

Different rules can be at play if you sell or gift your business to a family member rather than an unrelated party. Beyond business succession planning, estate planning will likely come into play, as well. Likewise, the tax considerations and consequences for a gift or sale differ, so enlist your bench for smart planning.

Small businesses like restaurants, retail stores, and farms, as well as service-based companies like real estate firms, can benefit from the long-term stewardship afforded by family succession.

Empower an Employee-Owned Cooperative (Co-op)

What is it?

In a co-op, the business is owned and controlled by workers. Ownership is awarded by shares, while a board usually manages governance, and decision-making is often by vote of all owners.

Why would it be a good idea for a succession plan?

Co-ops look to provide and create long-term stability for not just employees but the community, offering continuity of service and mission from a valued local business if employees are willing and able to take over ownership.

For business owners looking for a transition out of their business, a gradual shift to co-op ownership provides — or requires — a slower exit. A co-op is a way to ensure the continuity of a business you've invested in, sometimes for decades! It works well for service-based or worker-dependent businesses. Consulting firms, small manufacturers, and other local businesses, especially in food service, are examples of businesses that make sense for a co-op model.

What does a business owner need to think about when choosing this plan?

It can take time for owners to transfer knowledge and train employees to handle ownership and decision-making responsibilities. Employees may need external financing, seller financing, or an ESOP (Employee Stock Ownership Plan) structure.

Selling the Business

What is it?

Selling your business means just that: selling it to an interested community member, competitor, private investor, or private equity firm.

Why would it be a good idea for a succession plan?

You have a say in accepting an offer from a buyer whose business (and community) values align with yours and the chance to maximize the sale price. In negotiating the terms of sale, you may receive a larger payout than you would in a family transfer or co-op approach. You can also exit the business as soon as the sale is complete if you'd like.

Owners who need a full exit or liquidity or who own businesses with market appeal, including startups, tech firms, or companies with strong profits, can attract investors or buyers. If internal succession, whether by a family or co-op employee/owners, isn't an option, a sale can offer a rewarding financial return.

What does a business owner need to think about when choosing this plan?

You'll need to determine a valuation of your business and find the right buyer. Market conditions and your business assets and financials will factor into the value. You'll also need to decide how you want to structure the sale: lump sum vs. installment payments, earn-outs, and seller financing. Consider the related tax and legal implications. Potential buyers or their loan officers will conduct financial and legal due diligence, so be sure your financial records are in good shape!

What Every Business Owner Should Do When It Comes to Succession Planning

1. Communicate Transparently: Whatever your plan, plan to communicate early and often with employees, family, and stakeholders. Doing so prevents misunderstandings and unwelcome surprises. Consider your customers in your communications, too. When it's time to implement your succession plan, keep your public in the loop so they can keep trusting and supporting your business.
2. Plan Early: The best succession planning starts years in advance and can result in a smoother transition. Keep good financial records now so you've got them later. Factor in such contingencies as unexpected health issues, a family member changing their mind or being unable to take over, or a change in the market.
3. Assemble Your Succession Team: Any plan will require a bench of experts like attorneys, accountants, and advisors. Learn more about what each of these roles contributes.

Common Succession Situations

We know that every business is different and that every business owner has different priorities and goals — that’s what makes working with thousands of Bay Area small business owners such a joy! If you’re curious how various factors play out, here are a few common situations and the succession plan that may work.