5 Steps You Need to Take to Plan a Smooth Business Succession

5 Steps to Business Succession Planning

We frequently ask “what’s next?” Other times we phrase it as – “and then what?” These are helpful questions to ask yourself about the future, for yourself, your family and your business. You’ve read countless times about the potential horrors that occur when a person dies or becomes incapacitated and they do not have a plan in place. Similar horrible things can happen if your business does not have a succession plan. Did you know that only about 1 in 5 small business owners in the United States have made a succession plan?

Succession planning can take a few different forms. The classic example is if the original owner looks to transfer the business to a younger family member or trusted employee. A different situation occurs when there are an even number of business owners, how do they resolve problems if they deadlock? Another situation is what if the owner is away on vacation, at a conference, or absent from the business (or worse – becomes incapacitated or dies) and an important decision needs to be made?

You might start seeing a pattern here. Succession planning has different levels, different stakeholders, and different tools to ensure effectiveness. The name itself, “succession planning” requires the stakeholders to plan. On a side note, this type of planning can generate other financial benefits, though we’ll save that for a later time.

Business succession planning is a comprehensive strategy for transitioning a business from the current owner to a successive generation or to ensure continuity of the business if something happens to the primary decision maker. This is especially important to ensure a favorable transfer of ownership in a family-owned business. There are significant tax implications when transferring a business, this is why a succession plan with a restructuring plan will make certain that you can pass the baton to your successor with minimal disruptions.

The good news is that planning for a successful succession even helps your business thrive while you’re alive and healthy. Planning for succession will also likely free up a lot of your time once it’s done, allowing you to focus on other aspects of your business or spend more time with the ones you love!

Here are five key recommendations to get you started.

Start early

Rather than putting it off until you are near retirement, succession planning should be a fundamental part of your business strategy from the start. Indeed, a comprehensive succession plan shouldn’t be considered an end at all—it’s simply the beginning of your company’s next phase.

It takes an average of five years from start to finish to execute a succession plan, so you’ll need to get a jump on the process in order to ensure a transition of leadership goes smoothly, and your business, clients, and team have enough time to adjust.

Not to mention, things don’t always unfold in the way we imagined, and your untimely death, incapacity, or decision to pursue another opportunity could jeopardize the company’s survival. Effective succession planning, like estate planning, creates stability and security, ensuring your business will continue to grow and serve, no matter what.

Decide on your exit

A succession plan should be treated like a business plan. This means mapping out a clear vision of how you want things to look in five years, ten years, and so on. You should determine where you want to be, how you want to be involved, and what you want to get out of it. Will you sell to a third-party? Will you have a set price, or will you be flexible? Will one of your children want to take over? Do you want to maintain a certain level of involvement?

These are all questions that should be thought through and made part of your exit strategy.

Put it in writing

Just like a will, your succession plan should be formally documented, well-structured, and legally binding.

By putting the plan in writing and having it drafted as a legal document (or most likely, a set of legal documents), you’ll not only ensure that everyone is aware of your objectives and goals for succession, you’ll create a roadmap for the company’s future success.

Thorough documentation is especially vital when it comes to ownership transfers. By carefully laying out the terms and conditions surrounding the transfer of ownership, you can be confident that a new owner—and everyone else on your team—clearly understands the plan’s scope, expectations, and mandate.

As a trusted advisor, we can help you prepare a comprehensive succession plan that will shield your business from risks and conflict, while sustaining your legacy.

Include key stakeholders in the process

Family businesses can be some of the most difficult enterprises to create working succession plans. While choosing a successor within the family might look like the logical choice, it may also present difficulties. The process of choosing the successor might affect relationships between family members. If the key supervisor or manager is not a family member, then their point of view should also be considered. Therefore, it’s a good idea to open up a dialogue with all of the stakeholders affected by succession.

Obviously, if there are partners involved, succession should be a joint decision. But beyond that, you may want to consider including your company’s leadership team in the decision-making. If your top-level staff are not considered or allowed input, the succession is likely to be mired in conflict, with little chance for success.

While the final decisions regarding succession are up to you, if any of your top staff don’t agree with your plan or simply aren’t interested in continuing on without you, you might offer them options for leaving the company that honor their tenure.

Whether this is offering to buy back their shares or paying some form of severance, the goal should be to show everyone involved that you respect their contribution to the business and want them to enjoy continued success, even if it’s not with your company.

Work with an advisor and team of professionals

Because succession will undoubtedly have a major impact on your business, potentially involving reorganization, changing the legal entity, or even selling the business, it’s important to consult with a trusted advisor, who can guide you through answering “and then what?”

Because nearly every succession plan will entail detailed legal and financial actions, you should select an advisor who has expertise in those fields and can bring in a whole succession team (when appropriate) to work with you. Succession planning involves a number of different disciplines, so it is important to assemble your team early. Your key business and estate planning professionals which should include your attorney, accountant, tax advisor, and insurance professional should work together as a team to achieve your goals.

Having an unbiased advisor who’s outside of the business—and family—can allow you to objectively base your decision on what’s best for the business and not be swayed by emotion. We want to make you a hero to your business by guiding you step-by-step through the entire process of developing and implementing a comprehensive business succession plan.

We also have the expertise and experience to help you navigate all of the legal, financial, tax, and insurance complexities surrounding succession planning. Contact us today to ensure that the business legacy you worked so hard to build will continue to thrive even when you’re no longer running the show.