Succession planning is preparing a business and its owners for as many foreseeable circumstances that may arise during the life cycle of the business as possible. Obviously, we cannot plan for everything. The process requires the owners to identify the immediate requirements for managing and running their business and the long-term goals and strategies for exiting the business. From there, the business’ advisory team will develop a customized plan consisting of strategies to help ensure that the desired results occur in the event any of the foreseeable circumstances take place. Each strategy takes into account the potential management, liability and taxation consequences, and the strategy is implemented over the life of the business, with the idea that the strategies and tools may be modified or replaced in the event any of the following considerations change.

For most business owners, their business interests are their most important assets. Therefore, it’s critical that a succession plan is customized to address the owners’ specific needs and goals and is reviewed and updated at least annually to take into account the following considerations:

Short-term considerations:

  1. Management: What is the current management structure and what processes and procedures are in place to ensure the profitability and longevity of the business? Also, how will changes in the current management structure affect these issues?
  2. Quality Control: What processes and safeguards are in place to ensure the quality and performance of the products and services and to meet new demands brought on by new or existing customers?
  3. Resources: What additional capital resources (e.g. contractors, employees, equipment, etc.) will be needed to meet the changing requirements of the customers?

Long-term considerations:

  1. Ownership: How will you prepare for the loss, transition or addition of the owners? What requirements and checks and balances are in place for changes in ownership?
  2. Valuation: How will you prepare for the increased or decreased valuation of your business, and is there a plan for the sale or transfer of the assets or equity?
  3. Taxation: What are the tax consequences to the owners and the business in the event there is a change in ownership, the sale of the assets or other organizational change?
  4. Liability: Who will be liable for the risks associated with new ownership, new products and services or other business transactions?
  5. Environment: What will happen if market conditions or the state and federal laws that govern business entities change?

How it impacts your business:

Proper succession planning helps ensure entrepreneurs that they’re on the right road to success by providing them a compass for knowing when and what types of changes to make to the management structure, ownership and investment requirements, and other business processes. It also provides entrepreneurs with a game plan for minimizing risk if and when the owners decide to retire or withdrawal, or if they become deceased or incapacitated. Planning also prepares the business for significant changes such as sale, merger, liquidation or another transforming event.

How to take action:

To create and implement a successful succession plan, it’s important to first identify the short and long term goals of the organization and each of its owners. From there, assemble a qualified “advisory team” to assist in evaluating the potential strategies and tools that will be necessary to achieve the desired goals. At a minimum, the team should consist of a business attorney, an accountant or other business tax professional and a financial advisor, all of which need to work collectively to ensure the best potential plan for the organization. Once the strategies are determined, a plan is then developed with various protocols and requirements to ensure each owner’s commitment and the desired outcomes when the foreseeable circumstances occur. Lastly, the plan needs to be re-evaluated annually, and updated if needed, to account for changes in the business or the needs of its owners.