What is business succession?
A business succession plan is a strategy for what happens to your business if you’re no longer around.
The circumstances might be that you’ve retired rich and happy, or you’re immobile because you were injured or became ill. Whether it’s expected or sudden, fortunate or challenging, having a succession plan in place offers important security and clear financial advantages.
The first step is to consider what kind of succession plan you want. That means knowing the different options.
Imagine your business’s future if you simply disappeared. A solid business succession plan spells out the plan clearly enough that your business can be carried forward in your absence.
The main options are:
- Choose a successor. Pick the person who will take over the company.
- Set up a buy-sell agreement. A good option for a business that has co-owners, a board of directors or a number of partners.
- Hire outside management. Hire external resources to run the business in the absence of other suitable individuals.
- Sell or close the business. Sometimes this is the most sensible and viable option.
How to set up the plan and make it happen
Your chosen succession plan can include none of the above, a combination of the above or a strategy that specifies different outcomes for various situations.
Steps to setting up a business succession plan
- Step 1 – Decide: Choose which option(s) suit you best. Ideally, this can be done with outside help from an accountant or succession specialist.
- Step 2 – Set it up: Set up documents and verified written plans that can be carried out without you. It’s a good idea to make duplicate copies and ensure specific people know where they can be found, much like a will. A lawyer can help you ensure everything’s accounted for and in order.
- Step 3 – Keep it current: If your circumstances change, your plans might too. For example, if your child turns 18 and is interested in the business then you might amend your plans to name them as the successor. Or, you can arrange a buy-sell agreement if you bring on a partner.
What are the financial benefits of a good business succession plan?
Inefficiency, disagreements or unclear plans will cost your business and your estate money. A poorly-designed succession plan might not be feasible either, meaning your business might “go to waste” in pursuit of a plan that doesn’t work.
Estate lawyers and business accountants will often be able to advise you on the best way to set up a succession plan. Make it clear and concise.
What else to consider
Business succession insurance, sometimes known as key person insurance, can be essential to carrying out a succession plan.
For example, at first it might look like your only choice is to sell or shut down. However, once you factor in the insurance, hiring outside management could be worth the cost.
You can find policies to help with almost all of your succession plans.
- When naming a successor: An experienced person can help prevent losing revenue due to administrative disruption, or the cost of training to help get your successor up to speed.
- When using a buy-sell agreement: Paying for the cost of buying the lost person’s share of the company so the business doesn’t have to pay out of its own margins at a difficult transition time could be well worth it.
- When hiring outside management: The policy can help cover the cost of finding a suitable replacement for you, training them and accounting for revenue lost during the transition.