You’ve put the proverbial blood, sweat and tears into building your business. You’ve navigated its challenges and celebrated its growth. You may even have plans for what’s next — but are you planning for when you’re no longer around?
It’s easy to compartmentalize a succession plan as “what happens when I retire.” But succession planning is more than retirement planning. Succession planning is an opportunity to seriously consider business longevity. A truly healthy business can survive, or better yet, continue to thrive, after the departure of any key owner.
Here are tips to help ensure your business’ success when you’re no longer at the helm:
1. Start delegating early
The clients we work with often wear one of several hats within their business. They’re president, secretary, CFO and CEO — important roles, all concentrated in one person. They may have a sense of what they want for the future; perhaps they’ve identified a child or star employee to take over one of their roles someday. But someday often arrives sooner than expected. If you take yourself out of the day to day, what is left? Is the institutional knowledge of your business stored in your head, or has it been written down or shared with potential successors? Do your potential successors understand what their role would entail? Have you given them an opportunity to navigate a deadline, or negotiate new deals?
Continuity is key to operations, and any planned successor should be prepared to step into a leadership role sooner rather than later. Giving up responsibilities in small doses is also a great opportunity to ensure your prospective successor is up for the task. If your candidate does not perform as you expected or hoped, then you’ll still have plenty of time to figure out a Plan B.
2. Execute a buy-sell agreement
A buy-sell agreement is a contract between owners of a business that sets certain rules governing what an owner can (or can’t) do with their business interests. Often, such agreements focus on restricting how an owner can sell or otherwise transfer said interests. If an owner violates a transfer restriction, they’ve violated the agreement, and the other business owners may have recourse.
Buy-sell agreements are crucial if the goal is to retain ownership within a certain pool of individuals. Typically, owners choose who their co-owners are. Do you want to own your business with your co-owners’ bank, ex-spouse or heirs? Creditors of owners (including through unamicable divorces) or sudden sales to third parties put the harmony of your business at risk. Accounting for such scenarios in a buy-sell agreement will keep you from being surprised by new and potentially undesirable co-owners.
These agreements are also important for identifying what types of transfers of ownership are permitted. By carefully defining certain permitted transfers, you can save your co-owners the headache of signing extra paperwork to consent to transfers that don’t warrant the scrutiny. Common scenarios include transfers to an owner’s revocable living trust, or transfers to an owner’s personal representative at death. Does your business have an efficient protocol to respond to such requests? A properly constructed buy-sell agreement can offer peace of mind.
3. Remember estate and tax planning
Succession planning isn’t just personal, it’s financial, too. Passing the reins all at once may incur a large estate and/or gift tax obligation. Previously accepted methods of generating liquidity at the death of an owner have come under scrutiny (see, for example, the Supreme Court’s 2024 decision in Connelly v. United States).
If you are gearing up for your departure, you should work with knowledgeable counsel on a solid estate planning strategy. It may be prudent to gift interests over time (and utilize your lifetime gift tax exemption) or utilize other estate planning vehicles such as irrevocable trusts. The earlier you incorporate your estate planning, the more options will be available.
You can’t plan for every eventuality, but some basic planning now will save you a great deal of headache and risk in the future. Your business is an investment, and the strength of your investment shouldn’t be left to chance.
