Succession planning is important to prepare for. Without any sort of plan, new business leaders would have to start from scratch. Here are key points to consider when planning for a successful succession plan.

Why plan for succession?

Exit planning for a privately-held business

Exit Planning is the overall process which explores all strategic options available to a business owner which includes succession planning and sales strategies.

A well-designed exit plan allows business owners to:

• Control the process and timing for their business exit
• Achieve their personal financial goals
• Maximize their company’s value
• Facilitate their retirement
• Explore all valuable options for their business
• Promote long-term growth and survival for their business
• Minimize taxes on the transfer or sale of their business



Failure to have an exit plan can result in not achieving the highest value of the business, not being in control of timing or strategy of the exit plan, creating family fairness issues, paying additional income and estate taxes, not providing an atmosphere for longevity of key employees concerned about the control of the business in the future, and creating uncertainty for all stakeholders.



The succession and exit planning process is a highly personal process. These types of plans are not “one size fits all”. Every plan is considered unique to the individual circumstances of the situation. A successful plan should be one that can be easily updated to the current state of affairs. It is an orderly process by which ownership and management of a business are transferred to the next generation in a tax-effective manner.



For example, there is a couple named Wilbur and Edna. Wilbur owned a business. When Wilbur died in 2011, the company grossed $2 million in revenue. Profits were about $200,000 per year, including a salary. Wilbur employed 10 people, $50,000 in inventory, real estate was worth $130,000, and there was no succession plan. A month after Wilbur died, Edna shut the company down. She sold the inventory for $40,000, real estate for $80,000, paid taxes on the sale for $73,200. Overall, she walked away with $46,800. The company, however, was valued at approximately $980,000. Without that succession plan, there was no way to know the true values of inventory, real estate, etc. For the sake of those who were leading before you, it will help them in the long run.

5 Reasons to Plan for Succession

1. Taxes- Without a succession plan, taxes regarding the sales of assets such as real estate, inventory, etc. could increase as much as 20%.
2. Risk- While trying to reach professional and personal goals, the business may fail along with the health of the owner. Without a plan, there is no guidance from the owner.
3. Options- When starting your business, there are long-term goals made. This could include continued income for your family, available employment for family members, possibly a personal legacy. As time goes on, the available options to reach those goals steadily diminish. Having a plan stating those goals keep them to where you can continue to strive for it.
4. Control- Retaining control over the succession of the business is important. Without a plan, the government or opposing attorneys with decide what will happen to the business.
5. Value- Without a plan, you will not know the true value of what your business is worth. Like Edna and Wilbur, you will ultimately not get back what the business is worth.

4 Steps to Successful Succession Planning

1. Understand the goals and “human issues”
2. Develop Strategy
3. Value the Business
4. Finance the arrangement

Understand the goals and "Human Issues"

There are many kinds of goals to meet such as stakeholders like family, management, and owners. To understand the goals, you need to review each goal in terms of income involvement, investment, legacy, and values. Reviewing these goals will often keep you on track to reach your goals. Each person will have to come together to agree on what an ideal succession plan will look like.



When it comes to human issues, you have to identify those. Asking questions like: is there a long-term business plan, has ownership been promised to anyone other than the current owner, which family members are currently active in the business, what is their commitment to the business, what are business’ weaknesses, would an owner consider selling the business to “key” employees, why is the business profitable, are there family members not involved in the business that want in, etc.

There are a lot of questions to ask. Big life changes can disrupt a business, like the death of an owner, disability of the owner, bankruptcy or divorce, retirement, or withdrawal prior to retirement, etc. Understanding these disruptions and questions will help you build a strong succession plan.



Best case scenario is all three parties coming together and discussing expected annual income of business owner after sale (new amount after tax), who will own how much equity in business, explanation who will hold what positions and responsibilities, summary of desired level of involvement of business owner, and summary of how other goals will be met.

Develop strategy

When managing the succession planning, there are questions you have to ask.



• Who is capable to take over?

• Who is willing to take on new responsibilities?

• Does the person need any type of training to take over?

• What new compensation structures should be instituted?

For each of these questions, you should explore all strategic options and asking are those options legally and financially feasible?

Value the Business

The value of a business is what someone else willing to pay for it.

• Strategic value
• Stand-alone operations
• Fair market value
• Lowest defensible value

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