The transfer of ownership is far more than a handshake and a few signatures. Often there are millions of dollars in assets moving between all parties involved.

Brandon Berman, Director, Wealth Management

You’ve spent your life building your business, and the day-to-day may consume most of your time. However, there will come a time when that torch passes to a successor. Whether it’s the heir to the family business, your most trusted senior employee, or an outside entity looking to buy out the company, succession planning is one of the most critical moments in the life of your business.

Getting a head start on your business succession plan will prevent a disorganized transition. Unforeseen circumstances may expedite the transfer much sooner than you anticipated. As a business owner, you’ve probably harped on the importance of preparedness, but have you heeded your own words of wisdom and begun drafting a business succession plan? Get ahead of Father Time to ensure the longevity of your business with strategic succession planning.

What Is Business Succession?

Succession planning entails how you’ll inevitably pass along your company’s ownership. The ownership of your organization can go to several entities, not limited to your children, senior-level employees, competitors interested in your market share, or co-owners. A business succession plan evaluates every facet of the change and sets your company on a path for continued success under new ownership. Critical factors should be considered like valuations, potential candidates, sales predictions, and training for the eventual replacement.
The transfer of ownership is far more than a handshake and a few signatures. Often there are millions of dollars in assets moving between all parties involved. Accurate valuations, taxes, and shares will all play a significant role in the transfer. Businesses should take a more precautionary step and craft two different succession plans. One plan should be drafted in case of an emergency—for example, if the CEO or a key shareholder suddenly needs to be replaced for any number of reasons. The other plan is a long-term business succession plan, where the CEO or majority owner is planning for retirement. Whether expected or unexpected; events like illness, death, or departure from the company will negatively impact your business if no plan is in place.

Who Needs a Business Succession Plan?

Most business succession plans tie into the founder or CEO’s retirement. However, sometimes circumstances arise in which a growing organization is approached by a larger corporation looking for a buy-out. While those dealings may come out of nowhere, having a succession plan in place will make the transition easier.
Also consider drafting a business succession plan if your company has complex operational processes; you can’t just toss your new leader into the fire. Your company may suffer and, ultimately, your staff and customers may feel the effects of no planning. You’re an expert on running your business; your successor needs that knowledge to ensure their success.
If you’ve formed close relationships with your best clients, a succession plan should involve introducing them to the new leader (or prospective candidates), and assuring those clients that their relationships are valued and continuity of service is the business’s top priority. Long-time clients can be rightfully cautious about a change in leadership. Your valuation depends partly on future sales projections, so extending long-term contracts into the new leader’s tenure is critical to the financial growth of your business, and the success of your transition plan.

The High-Level Aspects of Business Succession Planning

Succession planning is a lengthy process, involving several preliminary steps and a number of moving parts. Let’s break down the most important aspects of crafting a business succession plan and what to look for in a successor.

Choosing a Successor

Choosing a successor for your business is one of the most significant steps in crafting a business succession plan. Perhaps you already have a successor in mind. How do you envision the company operating under their leadership? If they’re one of your best employees, let them in on what you’re thinking. Determine whether they want the job before crafting a succession plan around them.
You likely have a handful of candidates in mind, and that’s okay. There’s no need to draft a comprehensive plan for each candidate, but it’s sensible to weigh pros and cons before solidifying your decision.

Forward Planning

Performing a forecast analysis will aid you in selecting the best candidate, as you’ll have a better understanding of the challenges your company may face in the next five to six years. The best candidates will have the qualities necessary to tackle those challenges like a leader and keep your company on pace (if not growing) a few years after taking the reins.
A shortlist of candidates won’t appear overnight. Interview each to see how their visions and understandings of the business differ. Where do they see the company in the next five years, and in what direction might they take it that you hadn’t thought of?

Developing Within or From Outside

Candidates for ownership will come from either within the company or outside the company. Business succession planning is not something you can do in a year. You should plan on spending four to five years grooming internal candidates that you can see running the company in the future. Put them in leadership positions (if they aren’t already) and see how they manage their new roles in the long run. A candidate may show promise in year one but decline over the next several. You’re looking for someone to fill your shoes for the next few decades, not just someone to keep the company afloat for just a few years.
Alternatively, you may opt to bring in talent from outside the company. Candidates in executive-level positions at other firms have already proven their leadership abilities. Bringing them into your company and teaching them the day-to-day operations may be more appealing if there are no in-house employees fit for the role.

What to Look For In a Successor

Shortlisting candidates will prove more complicated than it seems, especially when you have plenty of talented candidates. Here are some valuable tips for narrowing down the candidate pool.
  • Essential Attributes: Ask yourself, “what makes a good leader?” Develop a list of the leadership qualities you believe are most important to running your company and look for those qualities in your candidates. However, don’t go looking for a clone of yourself. While you want someone who shares your vision for the company, a fresh set of values and practices can propel your business into the future.
  • Life Experience: Candidate A may have a Masters in Business Management. But Candidate B, who only has a BA in Finance, may have spent the past several years at helm of a company similar to yours. Does experience supersede education for your business?
  • Company Culture: The ideal candidate embraces your company’s culture. They’re someone your employees and board of directors will happily rally behind. If you select someone unwilling to embrace your company culture, you risk unwanted change in the workplace environment, which could drive top-performing employees to your competitors.

Create a Succession Timeline

While a 35-year-old CEO of a growing business may not be thinking of their succession plan right now, getting a head start on the process will take significant weight off the transition period. We generally recommend a five-year timeline for business succession planning, but that’s only if things go according to plan. If there’s one thing a business owner should know, it’s that life rarely goes according to plan, so adequate time will prove critical in the successful development of a succession plan.
Any number of out-of-your-control factors may pop up and deter your succession plan. Perhaps an illness forces you to leave the company sooner than expected. What happens if your top candidate accepts an offer from a different company? Early planning will prepare you to navigate these unforeseen circumstances, assuring that your final year with the company functions as a smooth transition period.

Types of Succession Plans

Your succession plan will change depending on to whom you plan on passing the torch to. The following are some of the most common ways to transfer ownership of your business.
  • Selling to a Co-Owner: If you are equal business partners, you may opt to sell your shares to the co-owner(s). However, many situations like this are the result of the death of a partner and lean on a founding buy-sell agreement. A buy-sell agreement is a binding contract that governs what happens to an owner’s shares upon death or retirement. In most cases, other controlling partners agree to buy out their shares to avoid conflict.
  • Keeping It in the Family: Passing the torch to an heir or other family member is a popular business succession method. However, it does come with its share of drawbacks. For starters, the heir must be equipped to run the business, and there must be a clear determination as to who will take over. Uninvolved business heirs can also use a buy-sell agreement to sell their shares to those who are staying involved.

The Benefits of Effective Business Succession Planning

You don’t have to bear the sole responsibility for drafting your succession plan. Having strong financial advisors, especially a long-term advisor, will help shoulder the burden of managing minutiae so you can better focus on running your company. Competent wealth managers, like Polaris Wealth Advisory Group, are uniquely equipped to handle these tasks, while also providing guidance on other financial matters.
Business and wealth succession planning is a critical part of any CEO or founder’s long-term approach for success. Taking the time now to develop a detailed succession plan can result in a smoother transition when it’s time to retire.
In the event of death, incapacitation, or any other unforeseen crisis, having an emergency succession plan in place will help provide continuity for the company and security for your family.
Having an experienced wealth management team on hand to consider all aspects of your business and family assets can accelerate your succession planning efforts and provide a greater sense of security. Polaris Wealth Advisory Group offers just that, providing a comprehensive set of solutions to help you be successful on purpose. Contact us and get planning today!

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