Business Succession Planning: Preparing Your Business for the Future
Building a successful business can take years—or even decades.
Business owners invest their time, money, relationships, and expertise into creating something that provides income for their families and opportunities for their employees. But eventually, every business owner faces an important question:
What happens to the business when I'm no longer running it?
That could happen because of retirement, death, disability, a decision to sell, or simply a desire to step away from day-to-day operations.
Business succession planning is the process of creating a strategy for what happens to your business when you leave.
A well-designed succession plan can help protect the value of the company, provide continuity for employees and customers, and create a clearer path for transferring ownership.
What Is Business Succession Planning?
Business succession planning is the process of determining who will own and operate your business in the future and how that transition will take place.
A succession plan may address:
Who will take over the business
Who will own the company
How ownership will be transferred
How the business will be valued
How the transaction will be funded
What happens if the owner dies
What happens if the owner becomes disabled
How employees and customers will be affected
How the owner's family will be financially protected
The earlier you begin planning, the more options you generally have.
Why Is Succession Planning Important?
Many business owners spend years building their companies but don't create a plan for what happens when they're gone.
Without a plan, an unexpected event can create uncertainty.
For example, if an owner dies unexpectedly, the family may inherit a valuable business but have no idea how to operate it.
Employees may be unsure who is in charge.
Customers may become concerned about the company's future.
Business partners may disagree about ownership.
A succession plan can help reduce these uncertainties by establishing a roadmap before a transition occurs.
Start by Defining Your Goals
Before deciding who should take over, determine what you want to accomplish.
Your goals might include:
Keeping the business in the family
Selling the company
Transferring ownership to employees
Selling to business partners
Protecting your family's financial future
Preserving jobs
Maintaining the company's legacy
Maximizing the value of the business
These goals can influence every other part of the succession plan.
Who Should Take Over the Business?
There isn't one answer for every company.
Potential successors may include:
Family Members
You may want your children or other relatives to eventually take over.
This can help preserve the business as a family-owned company, but family succession requires careful planning.
Not every family member will have the skills or desire to operate the business.
Business Partners
If you have partners, they may be the most logical buyers.
A buy-sell agreement can establish how an owner's interest will be transferred if they die, retire, or otherwise leave the business.
Employees
Some businesses may eventually transfer ownership to key employees or an employee ownership structure.
This can preserve the company's culture while providing an exit opportunity for the owner.
Outside Buyers
Selling to another company or investor may provide the owner with liquidity and allow the business to continue under new ownership.
Create a Buy-Sell Agreement
A buy-sell agreement can be one of the most important components of succession planning for businesses with multiple owners.
The agreement can establish what happens when an owner:
Dies
Becomes disabled
Retires
Wants to sell
Leaves the company
Experiences certain other triggering events
It can also establish how the ownership interest will be valued and who can purchase it.
Without a clear agreement, an ownership transition can become complicated quickly.
Use Life Insurance to Fund the Transition
Life insurance can potentially play an important role in succession planning.
For example, imagine two business owners each own 50% of a company.
They agree that if one owner dies, the surviving owner will purchase the deceased owner's interest.
The challenge is determining where the money will come from.
Life insurance can potentially provide the funds needed for the purchase.
The surviving owner may receive the death benefit and use the proceeds to purchase the deceased owner's business interest according to the buy-sell agreement.
This can help provide liquidity without requiring the surviving owner to immediately come up with a large amount of cash.
Key Person Insurance and Succession Planning
Key person insurance can also support business continuity.
A key person is someone whose death could significantly affect the company's financial performance.
That might be:
The owner
Founder
CEO
Top salesperson
Senior manager
Specialized professional
If a key person dies, the business may face lost revenue and significant replacement costs.
A business-owned life insurance policy can potentially provide funds to help the company manage the transition.
Determine the Value of Your Business
You can't create an effective succession plan without understanding what the business is worth.
Business valuation can involve factors such as:
Revenue
Profitability
Assets
Liabilities
Customer relationships
Intellectual property
Industry conditions
Growth potential
Comparable transactions
A professional valuation may be appropriate depending on the size and complexity of the business.
Your valuation should also be reviewed periodically because business values can change substantially.
Develop a Leadership Transition Plan
Ownership and management aren't always the same thing.
Someone may own the company without personally managing its daily operations.
Your succession plan should therefore consider:
Who will own the business?
and
Who will run the business?
You may need to identify and train future leaders before the transition occurs.
This could involve:
Leadership development
Cross-training
Delegating responsibilities
Documenting procedures
Developing management skills
Gradually transferring authority
The more dependent the company is on the current owner, the more important this preparation becomes.
Document How the Business Operates
A business owner often has knowledge that isn't written down.
You may know:
Which customers generate the most revenue
Which vendors are essential
How important processes work
Which employees handle critical responsibilities
How financial decisions are made
Where important documents are located
If something happens to you, that knowledge may disappear with you.
Documenting critical processes can make the business easier to transition.
Consider Your Family
Business succession planning isn't just about the company.
Your family may depend heavily on the business for financial security.
Consider what happens to:
Your spouse
Children
Other heirs
Business partners
Employees
If your family inherits the business, do they know how to operate it?
If they don't want the business, how will they receive its financial value?
Life insurance can potentially help provide liquidity so that one family member can receive the business while others receive financial assets.
Plan for Taxes
Business transfers can involve significant tax considerations.
The tax consequences can depend on:
Business structure
Type of transaction
Purchase price
Ownership
Estate planning
State and federal tax laws
Selling a business, transferring ownership to family members, or passing ownership at death can all have different tax consequences.
Because these rules can be complicated, succession planning should generally involve qualified legal and tax professionals.
Don't Wait Until Retirement
One of the biggest succession planning mistakes is waiting until you're ready to retire.
A good succession plan may take years to implement.
Future leaders may need training.
Ownership agreements may need to be drafted.
Life insurance may require underwriting.
The business may need to be valued.
Financial resources may need to be accumulated.
Starting early gives you more time to make thoughtful decisions rather than making them under pressure.
Review the Plan Regularly
Your succession plan should evolve with the business.
Review it when:
The business grows
Ownership changes
New partners join
A key employee leaves
The business value changes
You acquire another company
Family circumstances change
Your retirement plans change
Your life insurance coverage changes
A plan created when your company was worth $500,000 may not be appropriate when it is worth $5 million.
Questions Business Owners Should Ask
Consider asking:
Who will run my business if I die?
Who will own it?
Do I want my family to inherit it?
Do my partners have a buy-sell agreement?
How much is the business worth?
How will the ownership transition be funded?
Do we have enough life insurance?
Who are our key people?
What happens if I become disabled?
What happens if I retire?
Who knows how to operate the business?
Are critical processes documented?
What are the potential tax consequences?
How will my family be financially protected?
When was the plan last reviewed?
The Bottom Line
Your business may be one of your most valuable financial assets.
Without a succession plan, an unexpected death, disability, retirement, or sale can create uncertainty for your family, employees, customers, and business partners.
Business succession planning gives you the opportunity to decide what happens to the company before someone else has to make that decision for you.
A comprehensive plan may include a buy-sell agreement, business valuation, leadership development, key person insurance, life insurance funding, estate planning, and tax planning.
No single strategy works for every business.
The goal is to create a plan that reflects your ownership structure, family objectives, financial goals, and vision for the company's future.
You've spent years building your business. Succession planning can help make sure the value you've created has a clear path forward—whether that means keeping it in the family, transferring it to partners or employees, or eventually selling it to a new owner.