Succession planning is strategic planning for businesses.
Having a written, strategic plan to pass ownership and leadership to the next generation, to create a pipeline of capable leaders in a company, or to prepare a business for a liquidity event, succession planning is not only a best practice, but it’s what separates good from great companies.
A well-designed succession plan identifies and solves for the business, personal, financial, legal and tax issues that can arise when an owner retires, dies or becomes disabled. It identifies the steps an owner needs to take to prepare themselves and the business for a transition. Some common succession plan issues include:
- Does that owner have enough liquidity to transition comfortably, or will
the business need to be monetized? - Does the owner have a current estate plan? Does it support the goals
and objectives of the owner and the family? - Has a valuation of the business been undertaken? Are there Key
Performance Indicators for the company that need to be improved
before the transition? If so, what is the strategy to strengthen them? - What risks to the business have been identified? What are the
mitigation strategies? - Are there key employees that need to be retained? What mechanisms
achieve that goal? - Are the corporate documents current and in line with the market value
of the company? What is the ideal exit strategy? When would the
owner like to exit? - Who are the advisors at the table to create and execute the succession plan?
Businesses with written succession plans and supporting contingency plans automatically add value to their bottom line by mitigating the risk that comes with an owner or leader becoming disabled or dying unexpectedly.
Furthermore, business owners with succession plans are acutely aware of the current state of their organization when compared against a best-in-class company. Understanding how the business compares to industry competitors is critical to an owner’s personal financial success, as well as the company’s sustainability and marketability.
Why Do You Need a Succession Plan?
There is an old cliché that says, “Failing to plan is planning to fail.” While you may not always completely fail without proper planning, it is probable that you will not maximize the opportunity at hand without a strategy.
A business is likely the biggest asset held by the owner. Therefore, it requires protecting. It’s the proverbial Golden Goose that provides jobs for the employees, products or services to customers, income to the owner, and it gives back to the community through philanthropic endeavors. Given the impact on ownership, the economy and the community, why risk failure at any level?
Having a strategic, well thought, and holistic succession plan allows an owner to take advantage of income and estate tax strategies that could reduce the overall tax bill at liquidity or death. It creates a company that is ready, attractive, valuable and transferable at any given time. In the event of disability or untimely death, the plan creates financial protection for the employees, the customers and the owner’s family.
Creating a succession plan starts with the realization that it’s necessary for success, and it’s not a Do-It-Yourself project. Minimally, it will require the advice and expertise of an accountant, corporate and estate planning attorneys, financial advisor, and banker all working together for the benefit of the owner. Oftentimes it includes the management team and Board of Directors.
It will take some time to work through all the issues specific to the owner, but with so much at stake, why not plan to protect your legacy?
