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A Succession Plan Helps Keep Your Business Going Beyond Your Departure

  • A succession plan helps determine how your company will continue operations after you leave, either in a planned or unplanned way
  • Companies can transfer to family members, employees, other owners, or outside buyers
  • Plans should be developed in advance and regularly updated

Summary by Dirk Langeveld

While business owners tend to look to the future in developing strategies or creating budgets, they frequently put off a long-term consideration: what will happen to their business after they leave it. Yet this is a crucial consideration, as failing to plot out how the company will transfer to other owners can throw its operations into disarray and risk the collapse of everything you’ve worked to build.

A succession plan provides a road map for how your company will continue after the departure of any owners. It can also address thorny issues like the value of your company, resolving disputes, and what roles new owners will take on.

Choose your successors

For family-owned businesses, this is usually a simple task. Family members often take an active role in the company from an early age, and parents are eager to bring them on board as employees once they reach adulthood. Children with a longstanding relationship with the business are a natural choice to succeed the owner in managing the venture.

Of course, some business owners won’t have children who are able to step into this role, or their kids might be unable or unwilling to take over the family business. Other options include selling your ownership share to other partners, selling to employees, or finding an outside buyer.

When choosing your successors, you should consider who will take over both in management duties and ownership. You’ll want to identify all active and non-active roles each successor will take, and where assistance from outside professionals may be necessary. Naturally, you’ll want to inform potential successors that you’d like them to take your place and discuss the matter with them.

Outline the process

A succession plan should be a comprehensive document to address any issues that may arise in the transition of ownership and responsibilities. Identify your mission and core values to help ensure that successors continue to be guided by them. The plan should outline a clear decision-making process and a mechanism for resolving disputes.

Decide how ownership will be transferred. You might opt to pass ownership on to a successor as a gift, sell your ownership share, or sell your stake in the company at a discounted price. Owners may also opt to retain some presence in the company, such as a seat on the board of directors.

Have your business valued to determine a fair selling price. This process can be done by a certified public accountant or by an arbitrary agreement among all owners.

Bring on other professionals, such as an accountant and lawyer, to address issues such as tax issues involved in the transfer or how an outgoing owner may still receive a share of revenue as retirement income. You may also need to bring in professional advisors to assist you with a transition plan or take steps such as changing your business structure from a sole proprietorship to a corporation.

Create a timeline for the transition to follow. This will provide a clear set of tasks for transferring the company along with when you’d like to accomplish them.

Start right away

It’s easy to put off a succession plan in the belief that one won’t be necessary until you start planning to retire. However, a plan might be needed much sooner than anticipated if an owner dies, gets divorced, is no longer able to participate in the company due to illness or injury, or simply wants to exit early.

Establishing a succession plan early offers the company sound guidelines in case any of these circumstances arise. This also allows any named successors to receive the training and experience necessary to take over the company.

The succession plan should be a dynamic one. Review it at least once a year to update it.

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