Succession planning for your business

This article will ... Explain why a business succession plan is essential for protecting the future of your company. Outline the nine key elements every business succession plan should address. Highlight other issues — from valuation to estate planning — that your succession plan may need to cover.

It may be hard to imagine right now, but when you think about it, odds are that the business you’ve worked so hard to create will be owned by someone else in the future.

Eventually, you will either give up the helm voluntarily before or when you retire, or involuntarily as the result of an unexpected event.

Charting a path for your small business

These changes are why succession planning for business owners is so important. It helps you specify, in writing, what will happen to the business when you retire, become disabled, die prematurely, or otherwise step down.

• Will it be liquidated?
• Kept in the family?
• Passed on to a key employee?
• Sold to an outside party?

By creating a succession plan today, you can make the decisions now about what will happen to your company in the future. Your options range from keeping the business in the family to selling it to an outside buyer, and each path carries its own trade-offs. (Related: Ways to sell or transfer a business)

Make no mistake about it — succession planning is a multifaceted and complex subject. It is not a one-time event, but instead a continuous process that starts with your goals and builds and improves over time.

A succession plan is also a roadmap for you, your family, and your employees to help ensure that, in the event you are no longer able to run the company, any ill-advised decisions are kept to a minimum.

What goes into a succession plan?

Like any strategy your business may already have in place, a succession plan follows the same principles. It should address the who, what, when, where, why, and how you would like to transition your business. Your professional tax and legal advisors will be able to provide you with detailed guidance on setting up a succession plan customized for you and your company.

All succession plans should address the following:

For businesses with more than one owner, a buy-sell agreement is often the legal vehicle that puts many of these elements — especially transfer plans and the purchase price — into action. (Related: What is a buy-sell agreement for businesses?)

Other considerations for the future of your business

There are other areas that will be addressed as part of your succession plan. For example, you’ll need to indicate the true value of the company. (Business valuation calculator)

If there are now, or will ever be multiple owners in the future, you’ll want to specify what their ownership percentages will be. If a family member who works in the business is the chosen successor, you should indicate how you’ll plan for other family members, such as other children, who have no knowledge of the business.

Another issue to consider is how you’ll keep vital, non-owner management in place to ensure a smooth transition.

You'll also want to include instructions relating to taxes from the proceeds of the sale of your business, and detail what should occur regarding your personal estate plan, since your business is often your largest asset. (Related: Estate planning for business owners: 4 critical points)

Timing matters

Regardless of what form your succession plan takes, its ultimate success often hinges on timing. The sooner you start planning for the eventual transition, the more flexibility you’ll have in making future adjustments because — let’s face it — the only thing that’s guaranteed is change.

If you're not sure where you stand, it can help to gauge your overall exit readiness before you build out the full plan.

Since 1851, MassMutual has been focused on helping people secure their financial future and protect the ones they love. That mission is why we have thousands of financial professionals to assist you on your journey through insurance, investing, retirement planning, estate planning, and more.

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Frequently Asked Questions about business succession planning

Q. What is a business succession plan?

A. A business succession plan is a written strategy that specifies what will happen to your company when you retire, become disabled, die, or otherwise step down. It addresses the who, what, when, and how of transitioning your business to its next owner.

Q. When should I start succession planning?

A. The sooner the better — ideally years before you plan to step away, because starting early gives you more flexibility to adjust as circumstances change. Succession planning is a continuous process, not a one-time event.

Q. What should a succession plan include?

A. A complete plan addresses your goals, your successor(s), ownership and management roles, transfer plans, triggering events, a purchase price or formula, financing, and timetables. Many owners use a buy-sell agreement to formalize the transfer terms.

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Discover more from MassMutual…

Business owners: Know your valuation, especially these days

Selling your business

3 challenges of delayed employee retirement

This article was originally published in August 2018. It has been updated.

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