3 Steps in Creating Your Succession Plan

Finding time and enough resources to commit towards a multi-step, multi-year succession plan, while managing the controlled chaos of running a business can be daunting. When time is the most precious resource we have, spending it thinking about how to get out of a business we spent our lives getting into seems illogical. However, those same thoughts may contribute to the reason that only an estimated 30% of closely held businesses survive into the 2^nd generation of ownership and less than 15% successfully transition to the 3^rd generation.

Most experts suggest succession planning should begin anywhere from 10-15 years prior to the desired exit from the business. However, what about in the case of a death or disability of a key owner, officer, or manager? Furthermore, what if that same closely held business is responsible for 400 jobs in a community of 2,500 residents? The company has a significant responsibility to that community and its prosperity.  This speaks to the “sooner rather than later” theory, where it is never too early to build a succession plan. Owners of every age should  consider a succession plan and how it can protect against unforeseen circumstances.

Below, I have outlined the three phases of a succession plan which will be examined in more detail, along with real life case studies we’ve experienced, in upcoming issues of the Forensic and Valuation Viewpoints newsletter.

Goal Setting – Plan for yourself and the company

• Accepting the importance of a succession plan and committing to pursing one
• Planning for the unexpected
• Longevity of the business and its importance to the estate plan – personal wealth
• Income for self in retirement
• Income for family
• Family meeting
• Chance for owner to do something else
• Establish the team – accountant, valuation professional, attorney, insurance underwriter, other relevant professionals

Who Will Takeover – Transfer of operations, management, and control

• Family members
• Key employee(s)
• Develop a mentoring program
• Hired-in outsider
• No one – selling to 3^rd party

How Will We Do It – Actions steps to make and document the plan

• Buy-Sell Agreement
• Employee Stock Option Plan (ESOP)
• Sale
• Life-time gifting
• Post-mortem considerations
• Documenting your succession plan
• Willingness to review and revise if appropriate succession plan

Succession planning is not a process that is completed overnight and the best chance of success requires investing considerable time (even years!). Stay tuned for additional articles outlining client case studies we’ve experienced.