Many businesses do not have a succession plan in place. It is understandable that business owners would rather focus on operating and growing their businesses than planning for an unknown event – whether that event is the untimely death or disability of a member of the management team or the eventual retirement of the founder of the business.

There are significant reasons why a business owner should devote time to preparing a succession plan in advance of a succession event. For example, a succession plan allows the individuals involved in the business to discuss their plans for the business without the distraction and emotion that may be triggered by an actual succession event. A succession plan also provides a sense of security in that the management team has a plan in place and is not left feeling that they do not know how to handle the situation, which should make the transition easier to implement and less disruptive for the business.

Key considerations in creating an effective succession plan for your business include the following:

  • Information gathering. As an initial matter, the management and owners of the business should start a conversation about each individual’s expectations as to transitioning matters, including a review of each individual’s retirement plan and goals for the business, as well as potential exit events for current business owners. Different individuals may have different ideas and expectations as to how they wish the business to operate currently and in the future, especially when thinking about all types of succession and transition events, including death, disability, divorce, retirement or a disagreement with respect to the operation of the business. Advanced planning and communication, including an understanding of each individual’s plans and goals, are essential for preparing an effective succession plan.
  • Assessment of organizational needs. A succession plan should be tailored to the particular needs of the business and its management. Management should plan to review the current size of the business and its anticipated growth as well as the impact a succession event may have on the current
    customers, suppliers and lenders to the business. As part of this review, the roles and responsibilities of key employees should be identified and management should consider involving key employees in the process of identifying the potential needs of the business in a proposed transition. In addition, management should review any areas of operation that are dependent upon the efforts or know-how of one individual.
  • Personal succession matters. Closely held or family-owned businesses will want to pay particular attention to personal succession planning matters. These matters may include the specific needs of the business owners or the family, including overall cash flow needs, each family member’s interest in continuing in the business and each family member’s plan for retirement. Additional concerns may include estate tax and personal exit strategies. To create an effective succession plan, other professionals who advise the business, including accountants, financial planners and insurance providers, should be involved when reviewing these personal succession matters.
  • Plan development. While a succession plan need not describe every action and response, it is helpful to have a written framework for how transitional issues will be addressed. A succession plan should include the following:
    • A plan for communicating the transition of the business both internally and externally.
    • Procedures relating to record retention and record-keeping to ensure that critical business information is available in written form.
    • Procedures for ensuring adequate access to the assets and accounts of the business (for example, additional signatories may need to be added to the current bank accounts).
    •  Procedures to ensure that more than one individual understands the finances of the business and is able to administer its policies.
    • An overview of the short-term and long-term objectives of the succession plan.
    • Any agreements or arrangements between the owners and/or employees of the business (for example, shareholders’ agreements or buy/sell agreements).
  • Implementation. After the succession plan has been developed, the existing organizational documents and lending arrangements of the business should be reviewed and updated to the extent necessary to reflect the succession plan (for example, determine whether the definition of change of control in the credit facility for the business refers to specific individuals). Buy/sell agreements may need to be entered into and/or “key man” insurance may need to be obtained. As part of implementing the succession plan, management should inform the advisors to the business and management team, including accountants, financial planners and insurance providers, about the adoption of the plan. In addition, management should consider informing certain key employees about the general terms of the plan.
  • Periodic plan review. Once an appropriate succession plan has been implemented, it will need to be reviewed and reassessed periodically. At a minimum, management should plan to review the succession plan at least every two years. However, the review period should be carefully considered given the needs and situation of the specific business. For example, a business where the founder is nearing retirement age may wish to review its succession plan on a quarterly basis. Alternatively, if the business acquires another business or expands its operations into a new sector, the succession plan will need to be updated to reflect these changes in the overall operations and management team.

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