What is… business succession planning?

As a business owner, you know there will be a time when you leave your business.  Some common reasons are sale, closure, retirement, and death, but we all know that it is an inevitable eventuality.  Do you have a plan for what will happen then?  That's your business succession plan! (As a note, the term “succession planning” is often used in this area regarding businesses while in other places around the world the same term has a meaning closer to what is termed “estate planning” in the US.)

Many people don't think about what would happen if they or their partner (or a key employee, in some businesses) were to become incapacitated or die.  The idea of being unavailable to the business does not cross their minds.  Unfortunately, this is very common and can lead to making a difficult time worse should something happen.

Succession planning is essential for the long-term health of your business.  It ensures that if something happens to one or more of the owners and key employees, the business is able to continue.  It provides a way forward in the event of dispute or tragedy.

Some people have a business that is entirely based upon them and their skills.  In that case, the succession plan likely involves two options: one for transitioning the business to a successor with similar skills and one for closing the business should the owner retire, become incapacitated, or die.

When more than one person is involved in the business, it is important to ensure that there are documents in place not only laying out what each person's role, responsibilities, and ownership interests are but also what will happen to each person's role, responsibilities, and ownership interests.  Additionally, documents should explain what will happen in the event of a dispute and how the business might close in the future.  For example, one owner may be able to buy out the other owner at a pre-set price.  Without all of these documents in place, the business owners are leaving themselves open to times of difficulty and dispute.

Succession planning also helps fill any gaps when someone become unavailable, which typically occurs due to tragedy (whether personal or larger scale).  If you already have a plan in place ahead of time, then you avoid the scramble of figuring out what to do, how to do it, and when you can find the time.

There are many options in succession planning.  Some may want to utilize life insurance and agreements to take care of both their loved ones and business partners.  Others may name someone to wrap up the business or sell it.  Still others may find a way to transition the business to a key employee.

The best way to find out what options are available to you that meet your wishes is to talk to an attorney about it.  They may pull in other professionals, depending upon your wishes.  When I discuss succession planning with clients, I look at their business (not only entity type but also what their business is), listen to their goals, and work with them to find the best solution for them.

As with all planning, though, it is important that you keep your succession plan up to date and written.  You don't want to think you are all set only to realize you had a verbal agreement with an employee who leaves, for any policies involved to lapse, or for your loved ones to find that the person you named to manage things has since moved or died.  You also want to be sure that it still aligns with your plans; if you plan today, chances are good that your goals may have changed by 2035!

Being proactive with your planning protects you and preserves your business (as well as protecting your loved ones).