How to Create a Strong Succession Plan for Your Business

The Best Way to Make Your Wishes Stick After You Leave Your Business

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You may be thinking about retiring or leaving your business. If that’s the case, you’ll want to make sure your business continues the way you want it to. Business succession planning can help you preserve your wishes once you are no longer involved.

A business succession plan isn’t a separate document that the owner puts together. It should be primarily part of your business’s legal structure and be included in the governing documents of your business from the get-go. Here’s how to create one, what documents can play a part, and ways to ensure the transition process is smooth.

Creating a Business Succession Plan 

Begin your business succession planning by looking at the governing documents of your business and making changes to include your specific wishes for what happens if you no longer run the business.

The governing documents of a business are the legal documents that establish a business’s existence, and which govern its operations and internal affairs. Each business type (except for a sole proprietor business) has its own documents. The specific governing documents for each type of business include:

A sole proprietorship has no governing document, which means you need to create a written record of your wishes for your business with the help of an attorney, as part of your overall personal estate planning. These documents might include a will or revocable trust.

Where to Begin 

The key to a business succession plan is to consider how you want the management and control of your business to look in the future.

In an interview with The Balance, attorney Haley Ayure said that a complicated part of business succession planning is figuring out who should make the decisions in the future, and how to control that after you’re no longer involved with the business. This is tied to ownership and the governing documents because the owners typically vote to appoint directors, managers, and officers if they are not going to make business decisions themselves.

In a family business, for example, the ownership interests of a parent might pass to a child upon the parent’s death. Unless the governing documents say otherwise, the child might then have the ability to appoint themselves as the manager or officer.

Important Business Documents 

The language in a partnership agreement delegates specific instructions on what to do in the event of a dispute, a termination, a death, or other life-changing scenarios. This language ensures that your wishes will be carried out regardless of circumstance.

In an interview with The Balance, attorney Nance Schick explained that, when changes occur, a partnership agreement can be a great guiding document. A few examples may include: 

  • A dispute resolution clause that could provide the steps necessary to resolve conflicts among partners
  • A termination clause that can provide the steps necessary for resignation or removal 
  • Additional provisions that detail limitations on ownership by heirs or other outside parties, and what to do if a partner becomes disabled or dies

Without a clear, written agreement on such terms, business ownership can pass to multiple beneficiaries who may have no experience or interest in the business.

If you aren’t sure you need a business succession plan, consider that the cost of hiring a lawyer to draft good documents may be much less expensive than a fight with family or business partners in court.

How to Assure a Strong Succession Plan 

In addition to putting your succession plan in writing, planning for the transfer to new ownership will help smooth the process.

Here are a few planning steps to take before you leave your business. 

  • Review weaknesses in processes and work to strengthen them
  • Train and mentor your designated successor
  • Find incentives for key employees (like bonuses and stock options) to keep them on board
  • Consider changes in your business structure, for tax or other purposes
  • Decide what role you want to play in your business during the transition and afterward

There are two more important things you need to do to prepare for your business succession plan.

  1. Run a financial checkup. Do a financial checkup, including getting a business valuation, so you can spot weaknesses and fix them. One quick way to spot financial weaknesses is to run some financial ratios for your business and to analyze them in comparison to industry standards.
  2. Review policies. Reviewing company policies is important in making sure your succession plan does what you want it to. Prepare by setting your policies in place now. These may include setting criteria for positions and having job descriptions for key positions, up to and including CEO, board members, and managers, and setting policies for reviews and promotions.

The information in this article is intended to give you general information as you begin your business succession planning. It’s not intended to be tax or legal advice. Your situation is unique and taxes and laws are always more complicated than they might seem at first. Additionally, a document that’s not tailored to your specific situation could make things worse for you by creating outcomes that are the opposite of what you want.