Business succession plan isn’t a separate document that the owner puts together. So, 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.
Why You Need a Business Succession Plan
Think of a succession plan not as just determining who will succeed you, but as a continuity plan. So, in case of both plan transitions and unexpect disruption, like a public health or economic crisis.
So, the key pieces of your succession plan are:
- Identify possible successors
- Consider the value of your business and how to improve it
- Include tax and estate planning
- Anticipate uncertainty
- Decide how to transfer ownership
- Preparing for Your Succession Plan
Begin your business succession planning by looking at the governing documents of your business. Making changes to include your specific wishes for what happens if you no longer run the business.
Business Succession Strategy
If your business has several owners, like a partnership or limited liability company (LLC). You’ll need to make sure the governing documents take into account changes in the business structure if an owner leaves, dies, or is divorced.1
The specific governing documents for each type of business include:
- A partnership agreement for partnerships
- An operating agreement and articles of organization for an LLC (similar to a partnership agreement)
- Articles of incorporation, bylaws, and a shareholders agreement for a corporation2
- 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.
A succession plan and an exit strategy are slightly different. Both are plans to deal with planning for business changes, but an exit stegy focuses more on the decision to close or sell the business.
Choosing Your Successors
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 email interview with The Balance, attorney Haley Ayure said that a complicate 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 involve with the business. So, 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.
What To Include in Your Plan
So, 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. So, this language ensures that your wishes will be carry out regardless of circumstances.
In an email interview with The Balance, attorney Nance Schick explain 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 disable or dies
How To Ensure a Strong Succession Plan
Here are some other tips for creating a succession plan that will keep your business successful after you leave.
Decide Who Will Run the Business
So, decide what role you want to play in your business during the transition and afterward. Do you want to remain in a position of authority, and if so, how long? Or maybe you want to leave a legacy by serving as a consultant or board member after you leave active management.
Run a Financial Checkup
So, one quick way to spot financial weaknesses is to run some financial ratios for your business. Its also to analyze them in comparison to industry standards. Look especially at long-term indicators like solvency ratios. That is for measure the ability of a company to pay its debts and liquidity.