Future-Proof Your Business with Smart Succession Planning

Published on: Jan 10, 2024 by Nancy Mehlberg, CVB, EA

Updated on: March 11, 2024

Succession planning should be an important part of any business owner’s strategy, even if that succession will not take place for some time.

Adequately planning with plenty of time to work through any issues will ensure that when the time comes, your company will experience a smooth transition that will not disrupt business continuity.

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Types of Succession Plans

There is no one-size-fits-all for succession planning. We see three main perspectives and ways of going about succession planning.

The Long View

For those with time, identifying a successor who shares your values and has the aptitude to successfully run the company is critical, especially for family-owned businesses.

Once you’ve identified a successor, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. At the same time, you can identify how to best fund your retirement and structure your estate plan.

An Imminent Horizon

If retirement is near and you do not have a plan in place, you have a few options. In this 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 liquidation is the optimal move financially.

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, a buy-sell agreement is highly advisable.

Emergency Succession Planning

It is important to have a plan to ensure business continuity in the case of unforeseen events like illness or disability. This approach emphasizes enabling the business to maintain operations immediately after an unforeseen event causes the owner’s death or disability. If your company doesn’t yet have an emergency succession plan, consider creating one before you move on to a longer-term plan.

An emergency succession plan should name someone who can take on a credible leadership role if you become seriously ill or injured. It should also include 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.

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Setting a Date and Communicating Your Succession Plan

Creating and executing a successful succession plan requires decisive action and timeliness. It is important to set a target date – doing so will allow you to work “backwards” from the transition date to map out when major milestones should occur, such as when to start the search for a successor.

It can take years to appoint and train a qualified successor and work through the many management, ownership, and organizational issues. However, be careful not to choose a date too far into the future, as your successor-to-be may get tired of waiting.

Once you have formulated your succession plan, it needs to be communicated to your staff. This is essential for a seamless changeover and maintaining staff morale. Giving ample notice of the change will allow employees to voice any concerns or questions about the successor or the transition as a whole.

Break the news gently to gain their support for the new boss while giving employees good reasons to stay with your company. If disagreements arise, discuss the issues openly. Seek compromise by enabling your successor to exercise his or her newfound decision-making authority, but stay involved as a consultant to ensure he or she doesn’t alienate staff.

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Integrating Retirement and Succession Planning

While everyone needs to plan for retirement, as a business owner you must plan for retirement while also creating, updating, and eventually executing a succession plan. When planning for retirement, keep these areas in mind.

Retirement Date and Financial Needs

Decide when you want to retire and assess the financial resources required for your post-retirement life. To maintain your current lifestyle, you’ll likely need a substantial percentage of your current annual income. You may initially receive an influx of cash from perhaps either the sale of your company or a payout from a buy-sell agreement.

But don’t forget to consider inflation, which adds another 2% to 4% per year to the equation. If, like many retirees, you decide to move to a warmer climate, you also need to take the cost of living in that state into consideration — especially if you’ll maintain two homes.

Retirement Income Sources

Consider various income sources, including the sale of your business, consultancy roles post-retirement, and other retirement accounts.

If you plan to sell your business, think about whether you’d prefer to receive a lump-sum payment to add to your retirement savings or installments.

Some business owners pass their company to family members or trusted employees. In this case, staying on as a paid consultant would provide some retirement income. Of course, this would be in addition to any retirement accounts you’ve been contributing to, as well as Social Security.

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How to Determine if You Are Saving Enough

Even if you’ve been saving diligently for retirement, economic or market difficulties can force you to lower your salary or channel more of your own money into the company. This could affect your retirement date and, thus, your succession plan’s departure date.

Using a balance sheet, add up all your assets and debts. Heavy spending and an excessive debt load can significantly delay your retirement. In turn, this negatively affects your succession plan because it throws the future leadership of your company into doubt and confusion. As you get closer to retirement, integrate debt management and elimination into your personal financial approach so you can confidently set a departure date.

EXIT PLANNING: THE OFFICIAL GUIDE

Succession planning is a complex but essential task. It requires careful consideration of various factors, including retirement needs, business valuation, and potential successors. SVA can help you create or refine a plan that suits your financial needs, personal wishes, and vision for the future of your company.

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Biz Tip Topic Expert: Nancy Mehlberg, CVB, EA

Nancy is a Principal with SVA Certified Public Accountants and helps clients improve their company profitability and protects their interests by clearly understanding their future goals. She works closely and proactively with clients with an emphasis in business and income tax planning and financial reporting.

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