By Tom Ebbers, CPA, and Jeff Kowieski, CPA, JD

Business owners, by nature, do a lot of planning. One of the most important plans, however, is one you may not have considered yet. Specifically, it is crucial that every successful business has a well-thought-out succession plan. Much like everyone should have an estate plan or a will, you as a business owner should have a succession plan in place if you are thinking about retiring or selling the company.  The old axiom “those who fail to plan, plan to fail” is definitely true when it comes to succession planning.

Succession planning is the term we use to describe making a smooth transition from one business owner to the next, or from one leadership group to the next.  Sometimes succession planning is relatively simple, such as a father passing on the business to a son who has held a position of significant responsibility in the company for many years and has demonstrated the skills, knowledge, and leadership necessary to run the business. More frequently, however, succession planning must take into account a multitude of variables, each of which has its own set of challenges and impacts.

While there are several constant tenets to which all succession plans must adhere, no two situations are alike. Most important is recognizing that it needs to be done, doing it, and doing it right.

Tale of Two Companies

The principals of Company A passed their stock to the next generation. However, while they no longer owned the company, they could not let go. Despite being in their 80s, they continued to show up at work, draw a salary, and try to direct the operations of the company. The next generation, in its 60s, tried to prepare to pass along their ownership to their next generation, but they were still mired in dealing with the senior generation, causing a great deal of operational dysfunction and tension between the family members.

The owner of Company B targeted a date about 10 years in the future when he wanted to retire. Not having any family members as part of the company, he decided he wanted to leave the company in the hands of long-term, loyal employees. He identified four key individuals, each with a vital position in the company, and began to create a plan that would allow them to purchase the company over the span of 10 or more years. During the first phase of the transition, the owner functioned as the bank. During the second phase, ownership was fully transferred and financed through the operations of the company.

What It Takes

This second example highlights a key attribute of most effective succession plans: the operations and cash flow of the company must generate the revenue required to make the purchase. The example also illustrates two other important points: the succession planning process is ongoing, and it is best to start early.

There are numerous key elements succession planning must take into account, including the following:

• What are the owner’s goals?
• How similar are the goals of multiple owners?
• Is there a strong management/leadership team?
• What is the owner’s preferred income and lifestyle?
• How willing and able are the successors to take on risk?
• What are the tax implications to both owner and successor?
• Which structure is most tax-efficient for the company?
• To what extent is the owner willing to let go of operations?
• How can the company ensure that it retains its key people?
• Is the company’s culture amenable to a transition?
• Does the company have strong leaders other than the owner(s)?
• In the case of a family business, are decisions being made with the head and not the heart?
• Are successors being treated “equitably” and not simply “equally?”
• What is the financial stability of the company?
• How do all these considerations get weighed against each other for the optimum solution?

Where to Go for Help

The answers to these questions are by no means obvious. That is why business owners need a great deal of mentoring and coaching when it comes to succession planning. A good relationship with trusted advisers who have been through the process before makes everything much easier, especially if they are brought in early in the process.

A suitable succession planning adviser should have three key attributes. First, it should be a firm you trust to assist you with what could be the most significant transaction in your business career and the life of your company. Second, the firm should have a proven track record of building successful succession plans. Finally, it should be a firm that knows your company, your people, and your operations, and which understands you and your goals, both personal and professional.