Business owners are strongly encouraged to create succession plans to facilitate the smooth transition of their companies to the next generation or another form of ownership, ensuring continued success.
Ideally, the succession plan you devise for your company should unfold gradually over an extended period, allowing ample time for everyone to adapt to the upcoming changes. However, as demonstrated by many business owners during the pandemic, life can be unpredictable. Therefore, it's advisable to approach succession planning from three separate but parallel timelines:
1. Long-term. If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.
As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.
2. Short term. Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially.
In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.
3. In case of emergency. As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability.
If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations if executed.
As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes, and vision for your company.
For further questions, contact an Axley & Rode advisor.
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