Planning · November 04, 2021

A Deep Dive Into Business Succession Planning

When you leave a business you've helped build, you want to do so in a way that reflects your professional and personal goals. That means not only exiting at the time that works for you but also leaving behind a foundation that helps the team continue what you started. Similarly, what do you do when a partner unexpectedly departs from the business?


Thoughtful business succession planning is key to creating an exit strategy that works for you and puts the company in the best position possible. Understanding the steps you need to take and the elements of a good succession plan will help you leave behind a strong professional legacy and ensure what you achieved for your business stays secure.

The steps of succession planning

Every business is different, and so is every well-prepared succession plan. However, there are some fundamental steps that can guide you in your process.

1 Set your goals

The first step is to establish your personal goals. Do you want to work until you no longer can? Do you want money to travel the world? Take your time, and be very clear about your personal wants and needs.

2 Consult your partners

Second, if you're not the sole owner, have your co-owners go through the same process, regardless of their respective ages. Sit down with any co-owners and discuss your goals as they relate to the business. You may all want to exit at the same time, or one may want to continue working for 20 years.

3 Identify new managers

The next step is to discuss management succession. The key questions to cover include:

  • Who will take over when you retire?
  • Is someone already in place who could take on the role?
  • What kind of development does the future management team need to perform at your level?

4 Determine your exit strategy

In your discussion, perhaps you'll find the best option is to sell to your co-owners, a family member or a current employee. Alternatively, maybe you want to gift the business to an heir. You could also sell the business to employees via an employee stock ownership plan, or ESOP.

Be sure to consider other ways you could structure the exit from your business. Things can change. Your health could plummet, a crisis could arise, or your employee or child may not want the business. Consider what you'd do if Option A doesn't work out. Have multiple backup plans, especially if your primary strategy relies heavily on one person.

5 Craft and execute your plan

Document what you've decided and why. Lay out the primary plan, but include a section with what-if scenarios that addresses what you'll do if certain components don't work out as intended.

Then, it's time to put your plan in motion. Bear in mind that problems could still arise during the implementation phase, especially if your plan spans several years. Make sure you meet with the proper attorneys, insurance agents or estate planners to help you with the associated legal documentation.

Ownership transfer and business valuation

There are multiple ways to transfer ownership, and the method you use depends partly on your end goals. Here are some of the most common tactics that business owners use.

Repurchasing ownership interests

This is particularly useful if there are legal limitations on who can own the firm. In these cases, it's easier for the company to buy back your shares or interests and sell them to new or rising principals. This methodology supports an ongoing professional enterprise.

Selling to a co-owner

This works if there's a significant age difference between the owners, or if you're ready to exit the business and the other isn't. The optimal way to address this is to outline the buyout provisions in a buy-sell agreement created when you founded the company. If that time has long passed, you'll need to hash it out. Typically, and especially if not outlined in advance, a neutral third party conducts a business valuation to establish the value of the firm and its associated shares or interests.

Selling to an employee

Selling to an employee can be a good option if you have a high-performing team member who's interested in an owner role. You could also consider selling to a child or other family member who's already involved in the business. Determine the sales price as you deem fit. You can utilize a third-party appraisal or base the value on relevant industry figures. This could be a multiple of revenue or of earnings before interest, taxes, depreciation and amortization, also called EBITDA.

Selling the company to employees typically involves creating an ESOP and transferring the company shares into it.

Transferring ownership to an heir

This places the focus on reducing the estate taxes. In this case, transferring the shares at book value is typically best. This means the company's value equals the shareholder's or owner's equity that appears on the balance sheet.

Selling the business to an outside party

Selling to an outside party could mean that a competitor, a complementary firm or a financial buyer purchases the company. Generally, the more strategic the company being sold is to the buyer, the higher the price they're willing to pay. For example, a competitor may view a market position or a customer as key to its expansion.

On the other hand, financial buyers tend to focus on cash flow or EBITDA multiples and the strength of the financial statements. Have an idea of your firm's value for listing and negotiation, but the buyer will ultimately decide what they're willing to pay.

Key elements of a succession plan

Once you've decided how you'll prolong your business or utilize its value for yourself and your heirs, you need to create an actual succession plan to achieve these objectives. Here are the key elements to put in place.

1 Establish a timeline

When do you want to retire? Will this be a complete departure or a phased out departure? If the latter, how long will the phase out be? Are there multiple steps?

2 Identify your successor

If you're currently the CEO or general manager, who will take over for you? Is it an existing employee, or do you need to hire someone?

3 Create and implement a training and development program for your successor

If you're selling to the person who will be your successor—as with a child or key employee—this step is especially crucial, as it will greatly impact the success of the business. The best scenario is to have your successor in place and working as such for at least 6 months before your planned departure so you can address any issues that arise.

If you're selling to a third party, you can provide financial and operational evidence that the company produces similar results with the new CEO. This may help you command a higher price for the sale of the business.

4 Document operating procedures

To ensure your company operates at least as well as it did under you, you need to get all your means and methods out of your head and onto paper. A codified set of operating procedures will ensure that employees A and B and Managers C and D do things the same way and produce similar results. This standardization drives a high degree of replicability, predictability and peace of mind for new owners.

5 Value the business

Whatever methodology you decided to use, now is the time to value your business. Establish the value right before the sale occurs or the transition timeline kicks in.

6 Fund the succession

If you're self-financing a sale to an employee or family member, put all the funding agreements in place to support an installment sale, equity buy down or other means. If you're transferring the firm to heirs via a trust or other vehicle, finalize any applicable lending or third-party private investment agreements. If you're utilizing an ESOP, set that up. If you've chosen to sell to an outside party, make sure you work with an estate attorney and your business attorney to structure the sale in a manner that supports your objectives.

Planning will increase your business's value

Your business will be significantly more valuable the more it can operate as an entity separate from you. Accordingly, the business relationships, know-how and day-to-day decision-making need to reside within documentation, not just your head. This scenario reduces the risk for a buyer, as well as for an employee or a family member, because they can worry less about the business not delivering the same results once you're gone and feel more confident about its continued success.

The next step is people development. Having someone in charge who has the same characteristics that have already fostered the business's success will help maintain consistency. This means actually creating and implementing a training, education and mentoring schedule for your successor. From there, you can track and measure their progress.

Starting early will provide you with the necessary time. If you want your inexperienced, but determined, 22-year-old to take over, you may need a 10-year development horizon. However, if your 35-year-old is already involved in the business, you may only need a one-year timeframe. Whoever your succession candidate is, hold monthly meetings to review the financial statements so they understand the business's performance, and check in on any other tasks you've assigned them.

Be aware of potential barriers

One possible hurdle to overcome is competition among family or employees. Be sure to fairly vet all viable succession candidates. If you pass the business to multiple children, what will the ownership percentages be? Will you adjust roles based on each person's skills? If your business comprises the bulk of your net worth, you may want to sell the business to your successor and distribute the proceeds among your heirs. Consider when to sell and how to best structure the sale to reduce your taxes.

Will you utilize a trust? Although a 2019 IRS estate tax exemption minimizes the estate tax issue (often entirely) for most small businesses, if the transfer is improperly structured, the business, its assets or its sale proceeds could be tied up in probate for months.

Of course, there's a lot to think about in these matters. The objective, professional eye of a financial advisor might help you spot unforeseen issues, so you can better protect the investment you've made in your business.

Many entrepreneurs dream of a business that provides enduring value to their family and communities. Following these succession planning steps is how you ensure your reality matches your dream.

How to plan for a partner's exit

When a partner leaves your business, it can be a complicated situation. The dynamics can be even more complicated when a business partner dies because their heirs may inherit the shares. This means you end up in a situation where your deceased partner's spouse, child or other heir suddenly becomes your new partner, even if they don't have experience with the business.

To avoid confusion and trouble, have a clear succession plan that specifies what happens when a partner leaves. In your agreement, lay out how you'd like this to happen by answering questions such as:

  • How much advance notice does a partner need to give before leaving if they do so of their choosing?
  • Will your business buy out their shares and at what company valuation?
  • If your business can't afford to buy out the former partner, can they sell to anyone else? Or would your company need to approve another buyer?
  • Does the former partner agree to train their replacement before leaving?

Also, consider setting up a buy-sell agreement with all your business partners using life insurance. If a partner dies, the life insurance would pay your business money, which you would then use to buy the deceased partner's shares from their heirs. This way, you are free to pick your next partner while the surviving heirs get extra money.

With your company operating properly during the interim, you can focus on bringing on a new partner. Ideally, you'll want someone who can replace the departing partner's skill set and personality traits, that you don't have and are missing from your organization. Focus on this during your interviews.

If possible, see whether the departing partner can help with this process, both in interviews and future training. They might have a better feel for what their replacement needs because they've done the job themselves.

Take the time to build the right plan for your business

Business succession planning is complex and takes time, and there's no one-size-fits-all. That's why it's best to engage a trusted partner to help you determine the right succession strategy for your specific needs. Choose one with significant experience in business succession who can provide objectivity and help identify and explore options.

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