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How To Create a Strong Succession Plan for Your Business

Are you thinking about retiring from business? Or maybe your business is finally going well and you want to make sure it continues the way you want it to. Business succession planning can help you establish the next line of leadership, maintain continuity, and preserve your wishes for your business into the future.

Key Takeaways

  • A succession plan is a general plan for continuity of a business in a change of ownership in planned or unexpected situations.
  • The goal of a succession plan is to keep the business running smoothly during and after a transition.
  • A major part of a succession plan is legal documents with language that guides transitions.
  • The best time to create a business succession plan is immediately and then update it often.


Why You Need a Business Succession Plan

A business succession plan isn’t a separate document that the owner puts together. It should be primarily part of your business’s legal structure and be included in the governing documents of your business from the get-go. Think of a succession plan not as just determining who will succeed you, but as a continuity plan, to be used in case of both planned transitions and unexpected disruption, like a public health or economic crisis.

The key pieces of your succession plan are:

  • Identify possible successors
  • Consider the value of your business and how to improve it
  • Include tax and estate planning
  • Anticipate uncertainty
  • Decide how to transfer ownership


Preparing for Your Succession Plan 

Begin your business succession planning by looking at the governing documents of your business and making changes to include your specific wishes for what happens if you no longer run the business.

If your business has several owners, like a partnership or limited liability company (LLC), you’ll need to make sure the governing documents take into account changes in the business structure if an owner leaves, dies, or is divorced.1

The specific governing documents for each type of business include:

A sole proprietorship has no governing document, which means you need to create a written record of your wishes for your business with the help of an attorney, as part of your overall personal estate planning. These documents might include a will or revocable trust.34

A succession plan and an exit strategy are slightly different. Both are plans to deal with planning for business changes, but an exit stegy focuses more on the decision to close or sell the business.


Choosing Your Successors  

The key to a business succession plan is to consider how you want the management and control of your business to look in the future.

In an email interview with The Balance, attorney Haley Ayure said that a complicated part of business succession planning is figuring out who should make the decisions in the future, and how to control that after you’re no longer involved with the business. This is tied to ownership and the governing documents because the owners typically vote to appoint directors, managers, and officers if they are not going to make business decisions themselves.

In a family business, for example, the ownership interests of a parent might pass to a child upon the parent’s death. Unless the governing documents say otherwise, the child might then have the ability to appoint themselves as the manager or officer.


What To Include in Your Plan 

The language in a partnership agreement delegates specific instructions on what to do in the event of a dispute, a termination, a death, or other life-changing scenarios. This language ensures that your wishes will be carried out regardless of circumstance.

In an email interview with The Balance, attorney Nance Schick explained that, when changes occur, a partnership agreement can be a great guiding document. A few examples may include:

  • A dispute resolution clause that could provide the steps necessary to resolve conflicts among partners
  • A termination clause that can provide the steps necessary for resignation or removal
  • Additional provisions that detail limitations on ownership by heirs or other outside parties, and what to do if a partner becomes disabled or dies

Without a clear, written agreement on such terms, business ownership can pass to multiple beneficiaries who may have no experience or interest in the business.

If you aren’t sure you need a business succession plan, consider that the cost of hiring a lawyer to draft good documents may be much less expensive than a legal battle with family or business partners in court.


How To Ensure a Strong Succession Plan 

Here are some other tips for creating a succession plan that will keep your business successful after you leave.

Decide Who Will Run the Business

Decide what role you want to play in your business during the transition and afterward. Do you want to remain in a position of authority, and if so, how long? Or maybe you want to leave a legacy by serving as a consultant or board member after you leave active management.

Run a Financial Checkup

One quick way to spot financial weaknesses is to run some financial ratios for your business and to analyze them in comparison to industry standards. Look especially at long-term indicators like solvency ratios that measure the ability of a company to pay its debts and liquidity.

Get a Business Valuation

business valuation will help you spot weaknesses and fix them. You will need to find an accredited business valuation appraiser for this task, to be sure they are following standards. Check the website of the American Society of Appraisers to search for an appraiser.

Review Company Policies

According to Ayure, reviewing company policies is important in making sure your succession plan does what you want it to. Prepare by setting your policies in place now. These may include setting criteria for positions and having job descriptions for key positions, up to and including CEO, board members, and managers, and setting policies for reviews and promotions.

Review and Update Your Plan

Creating a succession plan isn’t just a “one and done” proposition. Set up regular reviews of the plan to see what’s changed, both inside and outside your company. Tax laws change frequently, so you’ll need to consult a licensed tax professional and an attorney to make changes in documents.


Frequently Asked Questions (FAQs)


What is business succession insurance?

Business succession insurance isn’t available, but you can use life insurance to provide benefits to co-owners of a business. For example, a partnership or the partners can buy a life insurance policy on other partners (not themselves). If a partner dies, the policy pays death benefits to the business or the other partners. The proceeds then go to the insured’s family members or heirs, while the living partners continue to own the business.5

A business can also get a key person insurance policy on a business owner or key executive. This insurance protects the business if the insured dies unexpectedly. This type of insurance is very helpful in a small business that might have trouble surviving the death of a founder or owner.6


When does business succession planning need to be done?

Small business owners should do business succession all through the life of their business. A succession plan isn’t just for retirement, but for unexpected emergencies or just a general review of the business.

Create a succession plan as soon as possible and review it at least once a year. Consider changes in the economy, employment, taxes, and the legal landscape. Get a new business valuation every few years to make sure the value is up to date. Consider the changes in the structure of the business, and in the plans of the owner.

Read more related articles at:

What is business succession planning?

Why Your Company Needs a Succession Plan

Also, read one of our previous Blogs at:

Did Robert Redford Have a Business Exit Plan?

Click here to check out our On Demand Video about Estate Planning.

Click here for a short informative video from our own Attorney Bill O’Leary.


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