A version of this article was previously published in the December 2019 edition of  Digger Magazine.

No matter how you’ve built and grown your business, there’s one milestone you’ll eventually approach: transitioning ownership to a successor. Whether that successor is a family member, management group, or a third party, succession affects your business, family, wealth, and future. 

To be successful, your plan must be developed well in advance, regardless of when you’re planning to transition ownership—now or in 20 years. This will help ensure your business’ survival and provide a return on the hard work and time you invested.

Why Succession Planning Matters

Few owners adequately plan the exit from their business. However, a succession plan is just as critical as a business plan. Succession plans map out the transfer of ownership, allowing for a business’ future success and helping business owners achieve personal goals.

Succession planning is also critical for avoiding undesirable transfer or succession results and, the sooner planning begins, the greater the likelihood that your business and personal objectives will be met. Without a succession plan, creditors and others will create a plan for you, or the federal and state government may take a large portion of your business assets to satisfy estate taxes.  

However, many business owners avoid planning for succession because the process can bring up personal sensitivities, such as family dynamics, retirement, or mortality. This can result in inadequate succession planning that reduces future taxes but doesn’t fulfill the owner’s vision for the family and business.

Great succession planning takes the needs of the business, owner, and family into account. When done well, it can empower you to build a lasting legacy.

Five Key Elements of Succession Planning

A thorough succession plan will address the following five elements. For each of these areas, it’s important to evaluate your current plans and determine if any areas require long-term assistance or immediate action.

• Business Finances: Securing and growing your company’s transferable value
• Personal Finances: Creating sufficient personal liquidity and net worth to fund your lifestyle and tend to your family’s needs and interests
• Management Succession: Developing key successors to enhance long-term performance, value, and transferability
• Estate Planning: Planning for the family legacy while helping to reduce the estate tax burden
• Ownership Transition: Structuring the transfer of the business to a successor

Typically, the two most complex elements are management succession planning and estate planning.

Management Succession Planning

A quality management team is critical to the ongoing success of your business. To build a quality team, you can take the following steps:

• Define goals and a schedule for stepping away from the business. These will serve as milestones for tracking progress and decision-making
• Identify successor candidates
• Evaluate your candidates’ strengths and weaknesses by benchmarking them against an inventory of the ideal skills, talents, and abilities required for management positions
• Determine the action steps—such as training, mentoring, or personnel changes—needed to build the new management team

Evaluate Your Team

Your plan should address whether your business has the right people in the right positions. If current management isn’t performing at an optimal level, succession planning provides a good opportunity to enact changes to strengthen team performance.

Review Your Structure

It’s also important to evaluate your organizational structure and culture, and ask some key questions to make sure you’re on track with your goals:

• Do your top managers want to be part of the future of the business?
• If not, how do you build a culture where key personnel want to stay?

Answering these questions will help drive the long-term success of your business as well as the economic viability of your overall transition planning.

Estate Planning

It’s essential to integrate your estate plan with your business succession plan. Your largest asset is likely your business, and the wealth generated from transitioning your ownership interests helps fund your estate.

Your estate plan should be as unique as the people it aims to protect. Taxes, family issues, asset protection, and effective wealth transfer all factor heavily into estate-planning decisions. You may wish to control the timing or criteria for distributions from your estate through trusts, gifting, or other tax-saving and asset-protection tools.

If you already have an estate plan, evaluate it periodically by considering the following:

• Does it fit your current financial and personal situation?
• Does your estate plan leverage estate tax rates and exemptions effectively?

We’re Here to Help

By focusing on the five key elements of succession planning early on and understanding your strengths and weaknesses, you can increase the likelihood of a successful future transition. For help with any stage of the process, please contact your Moss Adams professional.