How to Create a Business Succession Plan

How to Create a Business Succession Plan – Family businesses particularly reflect distinctive cultures and history, and may be challenging for outsiders even to understand. However, the actual process for creating a plan is remarkably uniform. Although a good plan is customized to the specific business and its needs, many standard principles apply across the board.

The value of having a plan in hand is universally recognized. It serves to facilitate leadership continuity, and prepare a framework, especially as change may occur quickly. Firms are advised to start three to five years ahead of any anticipated change in ownership and to review these plans regularly.

The meat of the plan

What goes into the plan starts with some general considerations, before moving into more specific elements. Successful business owners are attuned to fluid environments. They know key people will retire, new strategies and directions require different types of competencies.

The new plan must establish a collective vision and a set of goals. The plan is a place to define and align the roles, skills, and experience available, as well as any gaps to be filled. Should a family continue to own and manage the firm, or is it time to enlist professional outsiders? If family members are retiring, what are their objectives and cash flow requirements? What are the personal and career aspirations of the next generation?

After that foundation has been addressed, the plan creators turn to the essentials. Some important plan components are:

• Build a succession timeline, including dates where feasible.
• Compile a list of succession candidates, noting strengths and weaknesses for each.
• Assemble all relevant documents, including procedures, handbooks and employee training manuals.
• Decide on the method for valuing the operation, and the funding options.
• Put dispute resolution procedures in writing.
• Review any tax implications for the owner or for the business itself arising from a sale or transfer.
• If partners are involved, draft a buy/sell agreement as part of the plan, directing how everyone’s share should be distributed.
• Prepare funding mechanisms, such as life or key person insurance.
• Craft ways to develop internal talent.
• Forecast the firm’s future needs, focusing on market trends, compensation, and retirement schedules.
• Set out individual development plans, with any necessary training or coaching.
• With your attorney’s help, prepare or update all governing documents, which may comprise partnership or operating agreements, articles of incorporation, and written instructions regarding disputes, terminations for removal or resignations, death or disability contingencies.
• Arrange for delegating authority to successors.
• Consider how to retain employees through equitable compensation programs.
• Bring in external advisors, if warranted, to promote objectivity.

Implementation

The moment has come to roll out concrete action plans. Continue to monitor and calibrate. As the last stages fall into shape, you may be ready to circulate the plan to collect critical feedback. The instrument should be dynamic, constructed to adapt and adjust with changing financial scenarios. Open communication among family, stakeholders and employees leads to a more comprehensive blueprint.

If the timing of the transfer can take place during the owner’s lifetime, it may benefit all parties to maintain ongoing consultations. It might also lessen any prospects for a discounted sale. Linking the succession plan to an overall strategic plan provides a clear map for continuity into the future.

Many moving parts go into the production of a consummate plan.  Tap the expertise of your attorneys, accountants, and internal management to achieve desired results.

Copyright, 2023

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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